Revocations of hospital tax exemptions justified

The Illinois Department of Revenue demonstrated bold healthcare financial leadership when it revoked property tax exemptions to three hospitals last week because their average of 1.3 percent of revenues devoted to charity care wasn't high enough.

In revoking the exemptions to Edward Hospital in Naperville, Decatur Memorial Hospital and Northwestern Memorial's Prentice Women's Hospital in Chicago, the department applied a concise litmus test: "Is it a charity or a business? Is it Motorola or is it a soup kitchen?" department spokesman Mike Klemens told the Associated Press.

A great question--if not a seminal one, and it is one the department is applying to every hospital that has been recently expanded or acquired. I followed up with another department spokesperson, Susan Hofer, to put Klemens's remarks in the context of healthcare.

"They (the hospitals) provide care to everyone who needs it or for everyone who asks for it, and they make it known that they offer charity care," Hofer said. The trio weren't meeting that criteria, she added.

However, the hospitals were doing an excellent job of meeting the payment demands of their top management: Decatur CEO Kenneth Smithmier was paid more than $1.2 million in 2008, the most recent year for which data was available. Edward CEO Pam David was paid $1.5 million. Northwestern Memorial CEO Dean M. Harrison was paid $3.4 million--one of five Northwestern executives who received a seven-figure paycheck in 2008.

Just for comparison's sake, Motorola's CEO received $857,500 in salary in 2007, the most recent year for which that data was available.

If anyone has data on soup kitchen CEO pay, please get in touch.

Edward said it would appeal the ruling, while Northwestern said it disagreed with it. The Illinois Hospital Association (IHA) said it was "disappointed and deeply concerned" about the rulings.

"Hospitals in Illinois are vital community resources that deserve tax-exempt status ... providing services to thousands of people who do not have the financial means to pay for the treatment they need, and providing billions of dollars in benefits to their communities," said IHA President MaryJane Wurth.

Wurth neglected to mention that these hospitals are often also a resource for enriching their leadership--and Illinois is among the leaders in the Midwest in that particular achievement. One out of eight of the state's non-profit hospital CEOs are paid more than $1 million a year. Average total annual compensation statewide tops $600,000, or about 20 percent higher than what the Internal Revenue Service says is the national average.

Little wonder that the Prairie State--which has been struggling with huge gaps in tax revenues during the recession--is getting tough with those exemptions.

Medical bills fuel nearly two-thirds of personal bankruptcies in the U.S. Since most filers have health insurance, it's a trend that could be eased with paying their execs less and contributing some more toward charity care. Yet in California alone, more than a dozen non-profit hospital CEOs were recently paid more than what their hospitals spent on charity care.

"Some not-for-profit hospitals are serving the poor; others are raking in the bucks," said Shannon Brownlee, acting director of the New America Foundation health policy program in Washington.

According to Claudia Wyatt-Johnson, a healthcare compensation expert in Chicago, hospital board members are often bowled over by what the CEOs are paid. "We get the 990s, go through them in detail, and they see what the comparables are. Then we scrape (the trustees) off the floor," she said.

Nevertheless, Wyatt-Johnson noted, the boards consent to those payouts in order to attract what they perceive is the top talent. 

The compensation firms themselves may even be abetting the pay padding.

Pamela Knecht, president of Accord Limited, a Chicago healthcare governance consulting firm, observed that "it seems there is a possibility that when executive compensation firms are hired by boards and/or CEOs to provide multiple examples of comparable compensation, the firms may report out the higher end of the comparables."

Knecht qualified that she has no specific evidence that this is the case. Nevertheless, it sounds like her eyes aren't lying.

There's little evidence those trends are going to change anytime soon. At the American College of Healthcare Executives annual conference last spring, a majority of hospital CEOs polled on compensation thought they were underpaid.

That explains in part why the Illinois Department of Revenue isn't quite finished with putting hospitals and hospital systems under its microscope. It is currently examining the tax exemptions for hospitals affiliated with 15 other systems that meet their criteria for review. Don't be surprised if there are other revocations.

And if some healthcare CFOs--most of whom are paid significantly less than their bosses--don't take the risk of rocking the boat about compensation and charity care policies, expect to see other states follow Illinois's lead. - Ron