Financialization of Health Care: The Executives

Executive compensation matters because it’s such a clear signal of how the system has changed: from a doctor at the top running a healthcare system to a financial professional at the top optimizing for financial outcomes. (And for context, insurance company executives make far more than any of the figures below.)

Across 22 major nonprofit medical centers, average CEO pay rose 93 percent between 2005 and 2015. A near doubling in ten years, wildly outpacing anything happening on the ground. I don’t have the exact number for resident pay over the same period, but there is no way it went up even one percent.

At the very top of these systems, compensation runs five to seven million dollars and sometimes more. Memorial Sloan Kettering’s CEO, for example: about $7 million, and if you look at the breakdown, roughly half is salary and half is a $3 million bonus. You might think, maybe that CEO just crushed it that year, maybe everyone in the community got healthier. Wouldn’t that be nice? No. That bonus is largely tied to investment earnings, because remember, this is a financial firm now. And a lot of that return comes from growth: acquiring other groups to gain efficiencies and market power, which works precisely because it lets you charge patients more. It isn’t built around making healthcare better. It’s built around making healthcare bigger so you can charge more for it.

It’s still accelerating. Another study looking just at 2021 through 2024 found a 29 percent increase in CEO pay across those three years.

Here’s a number I like to look at for any organization that claims to be about values and giving back: the ratio of CEO pay to average employee pay. A real mission-driven organization has a small ratio. In 2005, hospital CEOs earned three times what orthopedic surgeons did, who are among the top earners in any hospital. By 2015 it was five to one. For pediatricians, the ratio went from seven to one to twelve to one. For nurses, it went from 23 to one to 44 to one. If I were evaluating a charity and saw a 44-to-one ratio between the CEO and the average employee, I would not believe it was a real charity. Do not assume that because your hospital is a nonprofit, it isn’t doing this. They’re all doing it.

Fine, being a CEO is a hard job. A lot of responsibility, around the clock, and that person should probably be the highest-paid person in the building. I just don’t know that it should be this high. More to the point: are the highest-paid executives actually the best? How is their performance measured, and how do we justify these salaries?

In one survey, 70 percent of CEOs said their performance pay was based almost entirely on financial performance. Only 20 percent mentioned community health as being tied to their incentive pay at all. The factors that track with higher executive compensation are system size and profitability. What’s rewarded is growth, either acquiring more or charging more for the same thing. There is no association between higher nonprofit CEO pay and mortality or readmissions. No evidence whatsoever that higher CEO pay relates to quality of care. The one non-financial measure that does seem to track is patient satisfaction, which, as I’ve said before, is a weak number, and which is how you end up with hospitals spending on fancy TVs and fancy lobbies. I’d rather be in a run-down old hospital with excellent care than a beautiful one that isn’t focused on it.

And no, these hospitals aren’t getting bigger because they’re caring for more patients. Over the same 2005 to 2015 period when CEO pay skyrocketed, inpatient stays fell 5 percent and office visits rose only 3 percent.

This is Goodhart’s Law on a grand scale: when a measure becomes a target, it ceases to be a good measure. We judge CEOs on financial performance and growth, not on how healthy their population is. So of course that’s what they optimize for. We shouldn’t be shocked that our healthcare system has become a real estate acquisition business.’

Consolidation and closures

Since 2008, there have been nearly a thousand hospital mergers, concentrating our roughly 5,000 hospitals under fewer and fewer systems. By the FTC’s standards for market concentration, more than 90 percent of metropolitan hospital markets are now considered highly concentrated, a marker of developing monopoly power that blocks competition, which is exactly what the big players want, and which is how you get higher prices.

Horizontal mergers, one hospital system acquiring another, are associated with price increases of 20 percent or more across the board, and if anything, quality goes down. Those acquisitions make more money through market power while care gets no better.

Who pays? I hate to be the one to tell you, but one way or another, it’s the patient. Yes, the higher charges go through the payer. But talk to the payers and they’ll tell you premiums rise because hospitals are charging more, and that gets passed down. In some studies, consolidation has driven patient prices up as much as 65 percent.

Rural closures are less cut and dried. A lot of things drive them, and it isn’t all greedy CEOs buying hospitals to harvest and shut them, or even private equity (you know how I feel about that). But it’s connected, because our system’s incentives aren’t aligned around taking care of communities. They’re aligned around financial outcomes, and the financial incentive to care for rural communities simply isn’t there.

Read Part II 

Read Part I