Do non-profit hospitals need another tax break?

Over the past decade, non-profit hospitals have become more and more like for-profit corporations in many ways, including their focus on the bottom line, hunger for market share, and salary compensation strategies. CEOs and other non-profit hospital executives are some of the highest-paid executives in the non-profit sector, with top CEOs making more than $10 million a year in 2014.

The tax law passed last year added a 21% excise tax to non-profit executive pay above $1 million, as well a tax on excessive “parachute payments” given to executives when they leave. Although many other elements of the tax bill are controversial, the logic behind this one is surprisingly sensible – non-profit organizations that are exempt from federal income tax should not be paying their executives multi-million dollar salaries.   

Hospitals argue that their CEO compensation reflects individuals’ skill set and talent, but the evidence does not bear that out. According to a 2014 analysis of nonprofit hospital CEO pay in JAMA Internal Medicine, CEO pay was not associated with financial performance or measures of quality of care that one would expect to be standard criteria for administrator compensation. CEOs were paid more if the hospital had higher patient satisfaction rates and high technological capability, but hospitals’ margins, capitalization, process quality performance, mortality rates, readmission rates, or measures of community benefit were not related to CEO pay at all. 

And as Dr. Roy Poses, Associate Professor of Medicine at Brown University, points out on his blog, CEOs of nonprofit hospitals are paid generous severance packages worth hundreds of thousands, even when they resign due to scandal or because their hospitals’ performance was poor.

Another common justification for high CEO pay is that salaries need to be high to compete with other hospital offers. Rather than improve hospital performance, this has just led to a spiral of inflation of CEO benefits, in which higher salaries beget higher salaries, none of which reflect executives’ actual value to the organization – much less their value to patients. This appears to be yet another case of the price being “whatever the market will bear.”

Hospital administrators are not taking this new tax policy lying down. As Tara Barrow writes in Modern Healthcare, hospitals are doing everything they can to skirt around the law, including rushing executive payments through before the law goes into effect, and replacing traditional deferred compensation packages with loans that go to their life-insurance premiums (which aren’t taxed because they are not considered wages).

“Everyone that I’ve spoken to wanted to take advantage of the opportunity to accelerate to avoid any excise tax,” said one health care consultant, quoted in the Modern Healthcare article, “If you had the opportunity to avoid paying a tax, would you do it?”

Lown leaders Shannon Brownlee and Vikas Saini recently chided the UPMC health system for their expansion plan that puts profits over patients, while still reaping tax benefits. Their message is simple: UPMC should create an expansion plan that actually prioritizes community health, or they should forgo their tax-exempt status. 

The same goes for non-profit hospitals that continue to pay CEOs unreasonably high salaries – You can pay your CEOs as much as you want, but don’t use our tax money to do it.