The American Red Cross is one of the nation's most venerable and largest charitable organizations, founded in 1881, with revenues of $3.5 billion in 2010. That year, Red Cross CEO Gail J. McGovern took home total compensation of $1.04 million.
Two executives at Lancaster General Health — CEO and President Tom Beeman and Executive Vice President Jan Bergen — got more.
According to a listing compiled by the American Institute of Philanthropy, Beeman and Bergen were compensated more handsomely than the CEOs of the American Cancer Society, the U.S. Olympic Committee, United Way Worldwide, Easter Seals, the National Urban League and the American Diabetes Association.
Yet, by nonprofit health care standards, top LGH officials were paid in line with industry norms.
Those norms, say a growing legion of critics, are scandalous.
For while a sprawling health care system with nearly $1 billion in annual revenues may be an extraordinarily complex operation maneuvering in a rapidly changing market, ultimately Lancaster General Health and similar systems are charities. And "when people see million-dollar salaries for someone running a charity, they are outraged," said Ken Berger, president and CEO of Charity Navigator, a nonprofit organization that evaluates American charities.
To be sure, executive compensation at LGH and other health care providers is one factor driving up medical costs — but a relatively minor one. "It doesn't account for anything but a small fraction of the actual cost, but people focus on it," said Dr. Sean Flaherty, a professor of economics at Franklin & Marshall College.
CEO pay has become a hot-button political issue in recent years, noted Flaherty: "The zeitgeist of American society right now is that we have this pay structure that's rewarding the people at the very top in exorbitant fashion.
"The story is, to compete for people with that particular talent and drive, the hospitals and hospital board have to keep up or they'll lose that talent to the for-profit sector."
The result, Flaherty said, is that hospital and health-system executives are among the highest-paid executives in the nonprofit world.
But should they be? Alex Henderson, the Lancaster attorney who chairs both the LGH Board of Trustees and its Compensation Committee (which determines how LGH execs should be compensated), notes that Lancaster General, like other health care systems, is primarily in the business of saving lives.
Beyond that, its leadership team is helping to transform LGH as the industry itself evolves and adapts to the Affordable Care Act (or "Obamacare") and other challenges.
It's a Herculean task, Henderson said, and "as the demand for top-notch hospital executives has grown, we have had to respond to that."
Berger, of Charity Navigator, doesn't buy it. Once a local health care system begins compensating its executives better than nationwide organizations such as the Red Cross, "we're coming up with every possible excuse for rationalizing something that's not acceptable."
Moreover, he said that under the current system, there's virtually no brake on executive salaries at a place like LGH. "You get 'log-rolling,' where the market, the norm, is over $1 million, and if everyone is doing it, we have to do it, too."
Prompted by a growing public backlash over what some perceive as "lavish" compensation in the nonprofit sector, lawmakers in two states have proposed capping the pay of nonprofit CEOs — and one California community has passed a measure doing it.
In January, a Florida legislative committee proposed capping salaries at state-funded nonprofits at a rate no higher than the salary of the highest-paid elected official in the state.
In Massachusetts, one lawmaker introduced a bill that would cap nonprofit executive salaries at $500,000; hospitals could seek waivers if they opened their books to the public.
Last month, voters in Santa Clara County, Calif., approved a ballot measure to cap the salaries and compensation packages of executives at El Camino Hospital in Mountain View, publicly owned by the El Camino Hospital District. Under "Measure M," annual salaries are to be capped at twice the salary paid to California's governor, which is $173,987 annually.
The hospital board has vowed to oppose the measure.
The Internal Revenue Service has been paying more attention to nonprofit compensation in recent years, and in 2009 it redesigned the Form 990 to require charities to disclose more detailed information on how executives were compensated. In 2010, the agency published a study showing that the average compensation for chief executives at nonprofit hospitals of all sizes was $490,000.
Following the report's release, U.S. Sen. Charles Grassley, R-Iowa, said he was concerned that hospital salaries may be too high, and that he was considering legislation to rein them in.
Commenting after that report noted that eight top Baltimore hospital executives took home more than $1 million in executive compensation in 2009, Baltimore Sun columnist Jay Hancock wrote: "Don't say they're worth it. Don't say that there's a 'market' in hospital-management talent and that organizations must pay top dollar. And really, don't start quoting Wall Street salaries to try to make these look reasonable. ...
"For top management, these institutions aren't nonprofit at all," he wrote. "So why do they continue to be tax-exempt?"
gsmart@lnpnews.com
