Salary differentials between Chief Executive Officers (CEOs) and line workers in large corporations remain enormous, and they continue to grow [5, 11]. The Economic Policy Institute determined that the ratio between CEO compensation and that of the average worker has increased from 20:1 in 1965 to 300:1 in 2014, with CEO pay increasing some 1000% during that span of time . Health care consistently ranks among the sectors with the highest discrepancy between CEO pay and that of the typical worker [5, 15, 16]. Business leaders often justify high executive compensation by pointing to the value created by skilled leaders in those positions (“talent has a price”) , and explain that when they don’t deliver value, CEOs feel the pain just as others in the organizational chart do . But many thoughtful observers disagree, and have suggested that current pay ratios are not merely galling but actually harmful to business growth [1, 9].
The topic is even more complicated in the world of not-for-profit organizations. High executive compensation in the nonprofit sector is a hot-button issue, and executive salaries at hospitals and higher-education institutions have long been identified as severe outliers among nonprofit entities , a pattern that has only grown more extreme with time .
While cost is only part of the value proposition, the cost-benefit calculus of high salaries for those in the C-suite of hospitals remains shockingly vague. How does their compensation compare to those who execute on the missions of those institutions (like doctors and nurses), how has it changed, and to what degree—if at all—can growth in executive pay be correlated with growth in their organizations? A thoughtful exploration of these themes appears in this month’s issue of Clinical Orthopaedics and Related Research® , presented by a team at Case Western Reserve University in Ohio (Fig. 1) led by the emeritus chair of the orthopaedic surgery department there, Randall E. Marcus MD , who also is the Chair of the CORR® Board of Trustees. His team determined that executive compensation at 25 leading nonprofit academic medical centers in the United States nearly doubled between 2005 and 2015. The wage gap between CEO compensation and that of orthopaedic surgeons (who are at the high end of the clinical pay scale) increased from 3:1 to 5:1 over that time; during that same time, the ratio between CEO pay and compensation to pediatricians (who are at the low end) increased from 7:1 to 12:1. The pay gap between CEOs and registered nurses—a group of employees who must complete far more education than does the typical industrial line worker—grew from 23:1 to 44:1 over that 10-year span. Findings were similar when Chief Financial Officer (CFO) compensation was used as the comparator .
Dr. Marcus and his team observed that the utilization of healthcare resources could not account for the growth in healthcare executive compensation; likewise, others have found that CEO pay does not correlate with quality of care, financial performance of their hospitals, occupancy, mortality, readmission, or measures of community benefit . And in a trend we’ve all seen replicated in numerous business sectors, it appears that women CEOs make substantially less than do men in comparable positions, even after sensible adjustment for confounding variables .
Should we be troubled by the findings made by Dr. Marcus’s team? Have the executives whose salaries have increased so sharply delivered a commensurate increase in value to their institutions? What is the “right” ratio between hospital CEO pay and physician (or nurse) compensation at a nonprofit hospital? Given that healthcare wages increased 30% over the span of Dr. Marcus’s study, to nearly 1 trillion USD per year—and that nonclinical workers accounted for more than a quarter of this growth—these questions should matter to all of us.
Dr. Marcus, senior author of “The Growing Executive-Physician Wage Gap and Burden of Nonclinical Workers on the U.S. Healthcare System,” shares the answers to these questions and others in the Take 5 interview that follows.
Take Five Interview with Randall E. Marcus MD, senior author of “The Growing Executive-Physician Wage Gap and Burden of Nonclinical Workers on the U.S. Healthcare System”
Seth S. Leopold MD:Congratulations on this thought-provoking study. Let’s begin with a big-picture question: Why would looking at the ratio between executive compensation and physician or nurse compensation be illuminating? It’s not as though a “correct” ratio has been (or could be) defined, right?
Randall E. Marcus MD: We appreciate your kind words and support for our manuscript. The cost of health care in the United States continues to increase at an astronomic pace. During the decade we examined (2005-2015), the national healthcare expenditure grew 30%, from USD 2.5 trillion to USD 3.2 trillion, and wages comprised 27% of this growth. Looking more closely at wage growth, we found that nonclinical healthcare workers comprised 30% of this growth. The value of each nonclinical healthcare worker, including executives, should be of concern to all of us and scrutinized closely by the boards of directors of these nonprofit medical centers. We posited a somewhat rhetorical question in our paper: “Are hospital executives worth twice as much in 2015 as they were in 2005?” Did hospital executives do twice as much work or bring twice as much value to the system over the time span of this study?
Dr. Leopold:Since you call it a “burden” in the title of the paper, I surmise that you are troubled both by the rate of climb of the nonclinical wages (and perhaps by the clinical wages), as well as by the increased proportion of healthcare spending that they represent. At the same time, I trust that you agree that physicians can’t do it alone; administrative staff is needed to cope with the regulatory burdens that are a part of contemporary practice in the United States. That being so, why are you troubled by the increase in nonclinical wages? Are they not a necessary expense under the current system?
Dr. Marcus: One of the takeaway findings in our study was the substantial increase in managers and nonclinical workers over the study period (about 900,000). By 2015, for every one physician, there was one management worker, as well as 10 nonclinical workers, and 14 nonphysician clinical workers. This expansion in nonclinical workers is a financial burden on the U.S. health system. We must find more-efficient ways to manage these regulatory burdens. In many situations, it is the physicians and nurses that carry this burden, while administrators are responsible for adding additional layers of time-consuming directives, which take time away from patient care. This can result in a self-perpetuating cycle, resulting in an increasing need for additional nonclinical workers.
Dr. Leopold:Back to executive compensation. Shouldn’t we expect to pay for talent, and given that the market seems to bear the upslope in the salary curves you observed, why is any of this problematic?
Dr. Marcus: When hospital leadership became “presidents” instead of “administrators,” there was a fundamental shift in perceived value of hospital executives. As you noted, and we referenced in our research, several other studies have also found no correlations between CEO pay and hospital quality (including quality of care), financial performance, or community benefit [2, 6, 7, 13]. The board members of these tax-exempt nonprofit hospitals should be held accountable by their communities for proper fiduciary leadership. In many cases, the use of consulting firms to assess fair-market value of executives is flawed, as we noted in our research. There are conflicts of interest between the hospital executives and these consulting firms to maintain this upslope in compensation.
Dr. Leopold:A CEO reading your paper may say that a good hospital executive delivers value back to the institution in excess of his or her compensation, and your study didn’t explore the question of value, since you didn’t evaluate returns on the dollars spent on executive compensation. A single well-considered healthcare systems merger could well justify an executive’s compensation for many years (and then some). Was your study therefore unfair to CEOs and, more importantly, how should the value proposition be assessed in future studies?
Dr. Marcus: Mergers and acquisitions were beyond the scope of our study. It is a challenge to acquire data on that topic, since those data are buried in the multitude of financial documents associated with such complex corporate interactions. Even so, one would hope that mergers of hospital systems would result in decreased nonclinical workers. During the 10 years of our study, there were numerous healthcare system mergers and acquisitions. However, the number of nonclinical workers increased 28%. The value that a CEO delivers back to the institution is difficult to justify based on healthcare systems mergers. Further studies should identify benchmarks for CEO compensation that directly correlate with improved care and community benefit at decreased cost.
Dr. Leopold:Analogously, pediatricians may read your study and say that surgeons are overpaid, and nurses may say that all physicians are. Surgeons in the United States are paid substantially more than they are in, say, Canada or Europe. Since there are so many more physicians than there are CEOs and CFOs, “right-sizing” physician compensation seems an even-larger priority. To what degree does the current healthcare system achieve this, and if the current system does not do it perfectly, how might future studies help to guide us to a more value-driven system of physician compensation?
Dr. Marcus: The cost of physician wages grew nearly USD 37 billion over the study period, while the cost of wages of nonclinical workers grew USD 57 billion. During the course of our research, we found that the total number of surgeons decreased (from about 53,000 to 41,000) and the total cost of their wages did not change. Physicians, including surgeons, cardiologists, and gastroenterologists, perform procedures, require advanced training and assume greater risk, all justification for their increased compensation. Regardless, all physicians and surgeons generate value by providing care to patients. The point of our study was to assess the growing financial burden of nonclinical workers to the U.S. healthcare system.
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