Hospital CEO Bonuses Reward Volume and Growth

June 16, 2013— -- Like hospital leaders everywhere, the people running Valley Medical Center in Renton, Wash., talk frequently about the need to control soaring medical costs.

"We are working to reduce the overall cost of health care and to transform health care delivery," Lisa Jensen, chairwoman of the hospital's board of trustees, said last year.

Experts say that's a good prescription for the entire U.S. health industry, which costs the economy far more than systems in other developed countries, but too often delivers mediocre results and is widely seen to be unsustainable at its current growth rate, according to a report from the Centers for Medicare and Medicaid Services.

But even as Valley officials talk about change, they're paying hospital CEO Richard Roodman tens of thousands of dollars in bonuses for driving the kind of profits and expansion many say are no longer affordable for patients, employers and taxpayers. In 2012 Roodman's pay was $1.2 million, which included a $213,000 bonus, about a third of which was related to financial goals and expansion.

Over several years his pay repeatedly included rewards triggered by specific achievements in building the hospital's business.

For example, when Valley exceeded profit goals for three consecutive years, Roodman earned a bonus each time. When patient volume increased at the hospital's primary and specialty care clinics in 2009, he got a bonus. When urgent-care center visits grew the same year, he got another bonus.

Across the nation, boards at nonprofit hospitals such as Valley are often paying bosses in part for financial and expansion goals rather than delivering value, according to interviews with compensation consultants and an examination of CEOs' employment contracts and bonus packages. Such deals undermine reform measures in the 2010 health law that aim to cut unnecessary treatment and control costs, economists and policy authorities say.

Find an extended version of this story and a chart linking to all the documents obtained for it at www.KaiserHealthNews.org.

"Boards of trustees in health care are oriented around top-line, revenue goals," said Dr. Donald Berwick, a longtime reform advocate who ran Medicare and Medicaid for President Obama. "They celebrate the CEO when the hospital is full instead of rewarding business models that improve patients' care."

Thirty percent of what's spent on U.S. health care is unnecessary, studies have estimated. U.S. hospitals spend twice as much per discharged patient as hospitals in other developed nations without delivering much better results, according to research financed by the Commonwealth Fund.

As public and private budget pressures prompt sharper questions than ever about how the system got so bloated, here is one answer: Hospital CEOs are paid to make it that way.

Kaiser Health News and ABC News obtained compensation details for CEOs at dozens of top nonprofit and government-supported hospital systems for 2011 or 2012 via public information requests and tax filings. In many cases hospitals declined to provide full details of bonus packages. At the same time, CEOs were quick to point out that their financial incentives are often part of a package that also promotes clinical quality, patient satisfaction and other goals.

"More than 60 percent of my performance incentives were either in academic missions or quality measures," said Dr. Sheldon Retchin, CEO of the Virginia Commonwealth University Health System in Richmond. "To say that I'm only interested in profits misses the entire mission."

Read Retchin's response. Retchin's goals for earning a bonus of $205,885 (plus a salary of $864,700) included boosting profits, surgeries, admissions and outpatient visits.

But for all the talk about reform, across the industry CEO incentives for traditional financial goals of boosting revenue and the bottom line still far outweigh those for rigorous quality and efficiency targets, experts say.

"What you're seeing is incentive plans that look pretty similar to what they looked like five years ago or 10 years ago," said James Guthrie, a hospital compensation consultant for Integrated Healthcare Strategies. "They're changing, but they're changing fairly slowly."

Examples of CEO pay linked to finance and growth include:

Incentive targets for UCLA Hospital System CEO Dr. David Feinberg included profits, revenue increases and "further hospital system growth." Feinberg earned a 2012 bonus of $262,534. Growth accounts for "only a fraction" of Feinberg's bonus, a system spokeswoman said.UCLA's response.

At Banner Health, a large, nonprofit system based in Arizona, CEO Peter Fine speaks of "an unwavering commitment to improve clinical quality and efficiency." But Fine's long-term incentive goals included profits and revenue growth, the organization's most recent filings with the Internal Revenue Service show. Banner's response.

Goals for the $84,394 bonus earned in fiscal 2012 by Dr. Steven Gabbe, CEO of Ohio State University's Wexner Medical Center, included profits, cash and growth in admissions, according to internal documents. OSU's response.

Michael Tarwater, CEO of fast-growing, Charlotte-based Carolinas HealthCare System, earned a $2.8 million bonus last year that included $1.6 million tied to targets including undisclosed financial goals. His total pay of $4.8 million that year reflects the "growth in scope and scale" of the organization, according to the system. Carolinas' response.

At the University of Virginia Medical Center, CEO Edward Howell proposed that his 2012 incentive bonus be tied partly to profits, new clinical initiatives and "expansion of the UVA Health System," according to internal documents. His performance bonus paid in 2012 came to $199,002. UVA's response.

Richard Umbdenstock, CEO of the American Hospital Association, said financial goals in executive bonus packages "have to include profitability or you are out of business tomorrow."

While targets for revenue and admissions reflect a system that has traditionally rewarded volume, he said, CEO incentive goals "are moving toward a greater balance toward quality and safety, patient satisfaction, employee satisfaction and finances."

At Valley Medical Center, outside Seattle, CEO Roodman's pay has been tied to profit and increases in procedures such as robotic surgery in addition to quality and patient satisfaction targets.

Financial strength is necessary for Valley Medical Center to deliver the best care, Roodman said via email.

"For us, growth is necessary as long as the demand remains, and we are growing as responsibly as possible," he said.

Roodman and other Valley officials portray the hospital's recent alliance with UW Medicine, at the University of Washington in Seattle, as a way to improve care and efficiency. But his 2013 pay package still includes incentives for expansion and profit.

The UW Medicine deal may contribute to both.

The alliance is "nothing about affordable health care. It's just about negotiating power with the insurance companies," said Dr. Paul Joos, an ophthalmologist and member of Valley's board who has clashed with Roodman and other trustees. "All these hospitals, they talk about quality and how to make things more affordable. But in the board meetings I'm at, they're always talking about how to charge you more."

KHN reporter Sarah Barr contributed to this story.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.