CEOs earn big bucks at nonprofit hospitals. Does that benefit patients? : Shots

Nearly half of hospitals in the U.S. are nonprofits, which means they don’t pay local, state or federal taxes. In return, the hospitals provide medical care, a social benefit, to their communities.

They’re also expected to provide some charity care to patients who cannot pay, and deliver services that promote community health, such as vaccine clinics or cancer screenings.

But despite their community-focused missions, the CEOs in charge of these nonprofits command large paychecks, that now top $1 million, on average. And their salaries keep rising.

Compensation for CEOs of nonprofit hospitals and medical systems grew by 30% between 2012 and 2019, according to a new study from Rice University’s Baker Institute for Public Policy.

That means the average paycheck for a top executive went from just under $1 million to $1.3 million, according to Vivian Ho, a health economist at Rice University.

The generous pay for health CEOs isn’t necessarily a problem, Ho says, if nonprofit health systems consistently deliver on their mission, which is to provide quality, affordable care.

But Ho worries these big salaries may be incentivizing CEOs to make decisions that don’t benefit patients, citing a study she published last year showing that larger hospital profit margins don’t result in more charity care.

The researchers analyzed federal tax documents and data and found that salaries increased across the board.

However, the CEOs with the biggest paychecks worked at hospital systems with the largest financial returns.

The question is whether the nonprofit medical systems achieving these rosy profit margins are doing so at the expense of their missions, subverting the intended purpose of their tax-exempt status.

One study found that less than half of nonprofit hospitals notify patients that they qualify for financial assistance before attempting to collect on an outstanding payment.

When it comes to unpaid medical bills, some of the most prestigious nonprofit hospitals in the U.S. garnish patient wages, while others cut people off from non-emergency care.

At the same time, Americans are less healthy than the citizens of other high-income countries.

Hospital board members often don’t work in health care

Ho theorizes that part of the reason that ballooning CEO pay doesn’t translate to more affordable health care is because executive compensation is decided by the hospital’s board members.

Many of those board members work in for-profit sectors, meaning their professional experiences and perspectives are often divorced from the intended mission of nonprofit medicine.

More than half of the board members of 15 top-ranked hospitals surveyed work in finance or business, according to a 2023 study. It also found just 15% of hospital board members had clinical training or worked in the health services sector.

“[Board members] are not evil,” Ho told NPR. “But I don’t think the incentives are set up correctly for them to think about the well-being of the entire community and affordability.”

When reached for comment, the American Hospital Association accused the Rice study of cherry-picking metrics and pointed to research showing that patient safety has increased in past decades.

“The study also falls short by failing to put hospital CEOs in the context of executive talent, by, for example, not comparing hospital CEOs to those at comparably sized organizations in other fields who are the talent that hospitals are competing for,” said Rick Pollack, the association’s president in an email statement.

Nonprofit hospitals and the competition for managerial talent

Executive salaries are increasing across all sectors, and that means nonprofits are pressured to offer bigger salaries to attract the best talent, said Lisa Bielamowicz, MD, a co-founder of the consulting firm Gist Healthcare.

“[Health care is] this very complex product with lots of technology,” said Bielamowicz. “It’s very, very staff- and labor-intensive. And the fact that a nonprofit is turning a profit … allows them to reinvest over time, build a cushion for rough times.”

While Bielamowicz agrees with Ho that more transparency is needed on how hospital boards set priorities, she explains that even nonprofit health systems must generate a “positive operating margin.”

A positive operating margin is what allows nonprofits to keep up with inflation, retain the best medical talent, and balance treating insured patients with those who are underinsured or uninsured. If a nonprofit hospital loses money or only breaks even year after year, they won’t survive.

Without positive operating margins, health systems might have to close a rural hospital or stop investing in needed services, such as addiction treatment or diabetes care. As hospital managers put it: “no margin, no mission.”

So financial health is crucial, whether a hospital is for-profit, or a nonprofit, said Bielamowicz.

It makes sense, she added, that CEOs get rewarded when they deliver on their organizations’ financial goals.

What’s the boundary between nonprofit and for-profit health care?

Ultimately, how much a nonprofit hospital CEO should be paid is a philosophical question, said Ge Bai, a professor of health policy and management at Johns Hopkins Bloomberg School of Public Health.

For Bai, the salary study provides more evidence that the boundaries between nonprofit and for-profit health systems in the U.S. has become too blurry, with the nonprofits operating too much like for-profits.

Tax breaks afforded to these nonprofits have allowed them to become hyper-competitive, Bai said, and this has led to a wave of mergers and acquisitions in the health care sector. Back in 2005, 53% of community hospitals belonged to a larger health system, according to data analyzed by KFF. That jumped to 68% in 2022.

Unless policymakers intervene, the consolidation will continue, Bai predicts, driving down competition and leaving patients with fewer choices and higher prices.

Bai, for her part, would like elected officials to do more to force nonprofit health care to deliver on its promise to taxpayers and their local communities. Through inaction, government regulators have allowed the system to become dysfunctional and profit-driven, she explained. It’s elected officials who have the power to ensure these nonprofits actually provide a societal benefit and don’t exploit their tax-exempt status.

It’s why the trend toward higher salaries is concerning, Ho argues, because generous compensation rewards nonprofit CEOs for maintaining the status quo.

This story comes from NPR’s health reporting partnership with KFF Health News.