Reference no: EM133089646
"Hospital CEO Pulls in $1 Million in Compensation"
read the headline in big, bold letters on the front page of the local newspaper this morning. Alicia Cooper, CEO of Golden Valley Health System (GVHS), sighed when she saw the headline. Every year, the local newspaper reports on compensation for the five hospital CEOs in the local market. The newspaper uses the information that is reported in each hospital's IRS 990 form, the annual tax return filed by all not-for-profit hospitals.
Cooper is the third-highest paid CEO on the list, despite the fact that GVHS is the largest not-for-profit hospital system in the local market, comprising three hospitals, one large outpatient surgery center, and comprehensive rehabilitation services. GVHS represents approximately $800 million in revenue each year. Although GVHS has experienced a 3% increase in admissions and overall patient visits, it reported a loss of $5 million last year, and a $3 million loss the prior year. While GVHS typically budgets a 3.5% total profit margin, the losses incurred over the past few years were not atypical given the weak economy, high unemployment rates, and the corresponding increase in the number of uninsured patients and escalating costs of healthcare delivery.
Nonetheless, executive compensation has grown significantly in recent years, particularly in the healthcare industry. This growth, coupled with the recent federal government bank bailout, has raised national criticism about "excessive" executive compensation. CEOs of multimillion-dollar not-for-profit health institutions are not immune to this criticism, as the charitable mission of not-for-profit HCOs exempts them from all federal, and most state and local, taxes. The benefit of tax-exemption is substantial, and critics argue that the public subsidizes not-for-profit hospitals, and therefore "excessive" CEO compensation, by forgoing this tax revenue. Still, not-for-profit hospital CEOs are, on average, compensated at lower levels than their CEO counterparts at similarly sized for-profit hospitals.
Cooper knows this new newspaper story will reignite conversation among members of the board of trustees, and they ultimately determine her salary. Until then, she wonders how she will respond to the criticism she expects to follow this story, criticism from the board, from hospital staff, and likely from the media.
CASE QUESTIONS
- How should CEO compensation for not-for-profit hospitals be determined?
- How should compensation of CEOs of not-for-profit hospitals and for-profit hospitals be compared?
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