CEO's retirement package could haunt hospital for years

Samuel Downing's last week of a nearly 40-year career with the Salinas Valley (Calif.) Memorial Healthcare System was an eventful one.

Downing's retirement as CEO of the 269-bed hospital was announced on the front page of the Los Angeles Times. However, the article barely mentioned Downing's accomplishments during his 26 years as CEO.

Instead, it focused on the nearly $4 million in lump-sum retirement payouts Downing took from the hospital, which is part of a public healthcare district. That's on top of his $150,000 annual pension. If Downing, who is in his late 60s, lives another 20 years, he will have taken about $7 million from a taxpayer-subsidized hospital for not working.

Downing's payouts came from multiple hospital accounts as a legal end-run around IRS regulations regarding inurement--excessive payments to executives of not-for-profits. I'd like to think someone in the finance department pushed back against this plan, as it was executed at the behest of a consultant.

Or maybe not. Downing was paid more than $668,000 in 2009, nearly triple the statewide average for a hospital district CEO in California. His two vice presidents of finance were paid more than $630,000 combined.

At least the hospital was spreading the wealth: Nearly 40 nurses on the payroll earned more than $150,000, and three were paid more than $200,000. The hospital spent more than $1,678 per adjusted patient day on staff salaries in 2008--about 60 percent higher than the average California hospital.

"I think I've earned it," Downing told the Los Angeles Times about his pay and payouts. "I worked for this institution and gave them my heart and soul."

Salinas, John Steinbeck's hometown, is part of the push-me-pull-you economic system of California's 1,100-mile-long coast. For every Carmel, Santa Cruz and Monterey with $4 million homes and $600 hotel rooms, there are far less picturesque towns--like Lompoc and Morro Bay--that house the hired help. Salinas is one of the biggest, a gritty agricultural town where nearly a quarter of the residents live in poverty--more than 50 percent higher than the statewide average.

This is borne out by some of Salinas Valley's bottom-line stats. It spent more than $14 million on charity and uncompensated care in 2008, about five times the average California hospital. And while it reported a surplus in that year, it lost about $64 million treating Medicare patients. Given the combination of California's woeful economy and aging population, those stats have virtually no chance of improvement for the foreseeable future. In fact, Salinas Valley had to eliminate about 600 staff positions over the past year. Downing's payout could have been used to save scores of those jobs.

I'd like to say that hospitals like Salinas Valley--where the compensation practices are as iffy as the patient demographics--are a rare exception, but they're not. I've examined the pay of nearly 2,000 CEOs, CFOs and COOs of not-for-profit hospitals over the past year, and there are dozens that have received seven-figure retirement payouts. Some even received millions more than Downing. Virtually all of those hospitals are facing the same demographic and funding time bombs as Salinas Valley.

Downing is entitled to a solid pension, but the extra money engineered for his exit will be sorely missed by his former employer--particularly if his successor believes it sets a precedent. Even with two VPs of finance putting their heads together in the coming years, it will make it hard for Salinas Valley to live up to its motto: "Neighbors Who Care." - Ron