State treasurer challenges NC health system executive pay as medical costs rise

Executive salaries and benefits at North Carolina’s nine largest health systems have grown dramatically at a time of rising health care costs, according to the latest in a series of critical reports from the State Treasurer’s Office.

CEOs at health systems often doubled their seven-figure compensation in five years, a growth rate few others in health care enjoyed, says the report, which State Treasurer Dale Folwell released today.

Folwell and experts at Johns Hopkins and Rice universities say they fear that amount of top-heavy spending shows these institutions are rewarding leaders for generating profits ahead of community health.

“They seem to be paid to merge and raise prices,” Folwell said at a news conference Wednesday.

The treasurer pays close attention to healthcare prices because his office oversees the State Health Plan, which serves roughly 740,000 state employees, teachers, retirees and their dependents.

Last year he warned state lawmakers that rising health care costs could require increased premiums and / or state appropriations to cover an anticipated $4.2 billion budget gap over the next five years.

He has called the healthcare industry in North Carolina a cartel, expressing frustration at the lack of transparency on prices for healthcare services.

Atrium Health, in a written response to Folwell’s criticism, said that executive pay is justified by the need to attract “business savvy” leaders who are able to handle complex challenges in a complicated industry.

“As a nonprofit health system, we don’t have the luxury of providing stock options and other typical corporate perks,” the statement said. “We’re proud of how our executive leadership team, including our CEO, strategically led this entire region through a global pandemic without any layoffs or rural facility closures.”

A Rand Corporation study last year found North Carolina, home to for-profit and non-profit hospitals, ranked 11th for most expensive outpatient care and 35th for inpatient care. Overall, the state ranked 20th in costs.

How the money works

Combined, the CEOs received nearly $39 million in pay and benefits in 2019, the most recent year in which the information could be gathered for all nine health systems, the report said.

That amount is equal to paying 572 registered nurses the average pay of $67,730 that year. In 2011, CEO compensation totaled $19 million, the report states.

Overall, executive compensation at eight hospital systems (not including UNC Health, which didn’t provide that information until this week) grew from $99.2 million to $172.5 million during between 2010 and 2019, the report said.

Some outgoing CEOs saw big compensation jumps from retirement packages.

Novant Health’s Paul Wiles received $11.1 million in his final year on the job in 2012, for instance, up from $2.3 million in 2011. Duke University Medical Center’s Victor Dzau received $8 million in 2015, up from $2.8 million the prior year. Wake Forest Baptist Hospital’s John McConnell’s compensation more than doubled to $5.6 million in 2019.

But others still on the job saw their compensation more than double in a few years. Atrium Health CEO Gene Woods initially made $1.7 million in 2016. By 2019 his compensation had reached $7.3. Dzau’s successor, Eugene Washington, made nearly $2.8 million in 2019 after making $1.2 million in his first year.

Washington’s compensation dropped to just over $2 million in 2021 as some hospital executives cut pay during the Covid-19 pandemic that brought a steep economic downturn. But most executives avoided pay cuts, the report found. Woods’ compensation grew to $9.8 million in 2021.

Steve Lawler, president and CEO of the N.C. Healthcare Association, also defended executive pay.

“It’s a uniquely tough time to be a successful hospital CEO, COO or Chief Financial Officer,” Lawler said in a statement Wednesday. “Many hospitals and health systems across the country and here in North Carolina are being forced to make difficult decisions to balance growing inflationary pressures and workforce shortages that drive up their labor expenses with inadequate reimbursement from Medicare and Medicaid on the revenue side.”

Concerns over salaries

The findings show a trend The News & Observer and The Charlotte Observer reported more than a decade ago in their Prognosis: Profits investigative series has continued largely unabated.

Back then, the newspapers found 25 nonprofit hospital executives who made $1 million or more and two former CEOs who received multi-million-dollar retirement packages. The treasurer’s report identified 52 in 2019.

Hospital officials say they offer the seven-figure compensation to compete in the marketplace.

“Executive salaries are appropriate within the market and for the complexity and size of the Duke University Health System enterprise,” said Erin Kramer, a Duke spokeswoman, in an emailed response.

UNC Health’s board chairman and vice chairwoman told the treasurer that too in a letter he received on Monday.

“UNC Health operates in a competitive marketplace and relies on recruiting and retaining the best talent to meet our mission on behalf of the people of North Carolina,” wrote Greg Wessling and Anne Faircloth. “As you know, UNC Health receives no state appropriations or funding for legislative salary increases. We fund our own salary increases, health plan and long-term liability.”

From 2012 to 2021, UNC Health’s revenues grew from $2.3 billion to $5.1 billion, faster than the growth in compensation, while staff expanded from 17,800 to 29,000, the letter states.

UNC Health CEO Wesley Burks is the system’s top paid executive. His compensation dropped from $3 million in 2020 to $2.4 million in 2021, UNC Health reported.

Atrium Health officials told The Observer last year that the amount spent on the pay and benefits for Woods and nine other hospital executives in 2021 was equal to less than one-half percent of total compensation for all employees.

Vivian Ho, an expert in health economics at Rice University who contributed to the report, said she doubted the market explanation for executive pay.

“People say being a CEO in general is an extremely tough job and you have to reward CEOs handsomely in order to keep them from leaving their jobs,” she said. “But I get the feeling that these CEOs who left these hospitals, it’s not like they jumped to a Fortune 500 company, they just retired.”

The report offered some praise for WakeMed, finding that Raleigh-based institution was the only one among the hospital systems that didn’t double the CEO’s pay in five years.

A time of consolidation

The compensation growth is happening at a time of hospital consolidation in North Carolina and beyond.

HCA Healthcare, a for-profit national healthcare conglomerate, bought Mission Health in Asheville in 2019. Atrium, which is the largest system in Charlotte and among the largest in the country, combined with Wake Forest Baptist Health in 2020, and late last year announced a merger with Advocate Aurora Health. New Hanover County sold its hospital to Novant in 2021.

Folwell at the news conference said complaints from residents in western North Carolina and the Wilmington areas indicate those consolidations have worsened health care.

“The fact is this consolidation and concentration of health care into the hands of fewer and fewer of these multi-billion dollar corporations who mainly disguise themselves as nonprofits is resulting in lower quality, lower access and higher cost,” he said.

Researchers involved with the state treasurer’s report said state and federal officials should look at the amount of executive compensation relative to the community benefits the hospitals provide, such as charity care, to see if they are deserving of nonprofit status.

The IRS collects community benefit information from hospitals, but the U.S. General Accountability Office found that federal law isn’t clear on what benefits qualify, nor could the IRS show that it regularly reviewed that data. North Carolina also lacks meaningful oversight of this information, the treasurer’s office has found.

“More disclosure is needed, more is desired, so more discussion can happen in terms of how to link the nonprofit status and how nonprofit hospitals can have their behavior aligned with their nonprofit mission,” said Ge Bai, an accounting professor at Johns Hopkins’ schools of business and public health who reviewed the treasurer’s report.

Folwell has called the healthcare industry in North Carolina a cartel, expressing frustration at the lack of transparency on prices for healthcare services.

“This is the largest transfer of wealth, especially from low and fixed income people, of anything that I’ve ever observed in my business career,” the treasurer said. “It’s all being financed, especially on the backs proportionately of low and fixed-income people – sick low-income and fixed-income people.”