Hospital executives' pay up 52 percent in five-year span

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by Brad Flory | Jackson Citizen Patriot

Pay to top executives at Allegiance Health is rising sharply in this decade, reflecting a national trend that is bringing scrutiny to not-for-profit hospitals. Compensation and contributions to benefit plans for Allegiance President and CEO Georgia Fojtasek totaled $763,965 in the hospital's most recent fiscal year.

Five years ago, Fojtasek received $435,914. That represents a five-year increase of 75 percent. Allegiance board members aim to set executive pay near the national median for hospitals of similar size, said Larry Schultz, chairman of the board and a member of the three-person compensation committee.

"We know where the market is because we have the data," said Schultz, a Jackson industrialist. "These numbers are necessary to run complex health systems."

Schultz described Fojtasek, who has led the hospital for 15 years, as "a great president."

"Our executive team is recruited nationally, and they come here as experts," he told a meeting of business leaders in Jackson last month. "The power of this kind of talent in this community is important."

Tax records filed by hospitals in surrounding counties shows the cost of paying CEOs rose an average 51 percent over the past five years.

Two regional hospital systems, Saint Joseph Mercy in Ann Arbor and Bronson in Kalamazoo, spend more than $1 million to pay their leaders.

Salary inflation hits smaller hospitals, too.

Eaton Rapids Medical Center, the area's smallest hospital as measured by revenue, spent $198,508 to compensate CEO Jack Denton in the most recent fiscal year. That is up 53 percent over five years.

Compensation to leaders of Bixby Medical Center in Adrian, Chelsea Community Hospital and Hillsdale Community Health Center ranged from $343,544 to $552,286.

Some hospitals reported one-year increases as high as 30 percent in the most recent fiscal year — but that was not the case at Allegiance.

Allegiance executives took pay cuts in the most recent fiscal year, thanks to a variable pay system that ties compensation to hospital performance.

Fojtasek's cut was 15 percent. Her pay and benefits peaked one year earlier at nearly $900,000.

The same general trend applies to eight other key Allegiance Health executives whose pay is disclosed in tax documents open to the public.

Compensation to key employees, mostly hospital vice presidents, increased an average 46 percent over five years.

All eight executives listed topped $200,000 and one topped $400,000 in the most recent fiscal year.

Schultz said the Allegiance Health board goes to considerable lengths to ensure executive pay is competitive but not extravagant.

"We have a robust compensation policy," Schultz said. "My job, as leader of that process, is to be a good fiduciary."

Not everyone agrees on what qualifies as reasonable pay.

How much is enough?

"For CEOs of nonprofit hospitals to make amounts like this at a time when health care is in crisis is, in my opinion, outrageous," said John Karebian, executive director for labor and government relations for the Michigan Nurses Association, a union of 11,000 nurses.

"At what point is enough enough?" he asked.

That precise question was examined by the Internal Revenue Service in a three-year study released in February.

Collecting data from about 500 hospitals, the IRS found the median cost of compensating CEOs in 2006 was $377,000. The median at hospitals roughly the same size as Allegiance was $642,400.

The IRS conducted the study to look into whether not-for-profit hospitals comply with rules charity organizations must follow to qualify for their tax breaks. One such rule is they must pay reasonable compensation.

Most hospitals have sound business practices to set executive pay, the IRS concluded, but it is difficult to gauge what is reasonable.

"Amounts (of pay) reported appear high but also appear supported under current law," the IRS concluded. "To some, there may be a disconnect between what, as members of the public, they might consider reasonable, and what is permitted under tax law."

One person who felt the disconnect was U.S. Sen. Charles Grassley, an Iowa Republican. Grassley said in February he planned to introduce legislation to hold the line on pay to hospital executives.

No legislation has been introduced, but Grassley's press secretary said he is still "pursuing legislative reform of the laws governing tax-exempt organizations."

Reacting to news that one hospital executive there makes nearly $3 million a year, a committee of the Rhode Island Senate approved a bill in May to cap hospital pay.

Hospital representatives tend to see such measures as oversimplified overreactions.

"It's very justified for the public to ask about this," said David Seaman, executive vice president of the Michigan Health and Hospital Association. "The issue really becomes: What is the value of the CEO of the hospital to that community?"

Running a hospital, Seaman said, is much different than running most other charity organizations.

"They are large institutions, they're complicated, and unlike a lot of other jobs, people's lives are literally at stake," he said.

"There isn't a sense that these salaries are at all out of order."

Allegiance Health is Jackson County's largest employer with 3,529 full- and part-time employees, and it has a growing network of ancillary services and companies.

Schultz calls it the largest and most complex organization in Jackson.

"We need to be able to attract the best talent and pay a competitive wage," Schultz said.

Fojtasek did not comment. She said the hospital board sets her pay and it is not appropriate for her to explain board decisions on this topic.

Setting the salaries

Pay trends are complicated by several factors. For one, not everything classified as income by the IRS translates into actual money in the pockets of hospital executives.

Allegiance offers a deferred-income benefit, for example, executives receive only after they retire from Allegiance. In Fojtasek's case, that can add more than $100,000 to her annual reported earnings even though she will not see the money for years.

IRS rule changes made periodically also confuse the picture for year-to-year comparisons. For example, in 2006 the IRS ruled that unused vacation time must be declared as compensation, inflating some reported income figures.

The Allegiance board sets executive pay each year according to a written policy and a fairly complex process. At rock bottom, the board tries to follow the national median.

Consultants at a company called Sullivan, Cotter and Associates survey hospitals of comparative size and report on median pay each year.

Growth at the Allegiance, such as the Heart Center opened 18 months ago, does not directly trigger executive pay raises. But with growth the consultants eventually look to bigger hospitals for comparable pay.

Variable pay means executives earn less in years when hospital or personal performance are not fully satisfactory.

Maximum pay was awarded in just two of the last five years, Schultz said.

Big swings up and down are caused by the variable pay system. Total compensation and benefits reported for Fojtasek in this decade include one-year increases as large as 68 percent and pay cuts as large as 20 percent.

Top executives command more dollars, but Schultz said they receive no favoritism in the philosophy for pay.

"The board of trustees targets total compensation packages around the median," Schultz said.

"That is no different than what we do with our nurses or the people who clean the rooms."

http://www.mlive.com/news/jackson/index.ss..._pay_up_52.html