Tax forms not always clear
Some Internal Revenue Service Form 990 documents list payments to hospital directors, even though administrators say directors are volunteers. Those payments can occur for a couple of reasons. In some cases, the person is an employee of the hospital, such as a doctor or an administrator, in addition to serving on the hospital board. (At St. Charles, none of the board members are St. Charles employees.) Hospitals also oftentimes reimburse directors for attending conferences or continuing education courses that were required as part of their board duties. Directors are also reimbursed for their travel and meal expenses related to attending board functions.
For example, the tax form of Roseville, Calif.-based Adventist Health, which operates two hospitals in Oregon, lists money paid to every board member. Four of those board members, however, are Adventist employees. The other $25,000 in payments was reimbursement for attending conferences as well as travel and meal expenses, said Adventist Spokeswoman Judy Leach.
“Our board members do not receive compensation for being board members,” she said.
Likewise, the Form 990 for Shriners Hospitals for Children, which operates a hospital in Portland, lists $209,000 in payments to three directors in 2012. Fabiana Lowe, a Shriners spokeswoman, wrote in a statement that all Shriners’ board members are volunteers. Two of the directors who were paid are also employees of the health system, one was reimbursed $900 for board-related expenses and a third was paid by Shriners International, a separate organization that founded Shriners Hospitals for Children, for his role in that organization. Lowe did not specify that director’s role in Shriners International.
St. Charles reimburses its directors for travel, meals and attending conferences, but those expenses were not reported in tax records, and the health system declined to provide them for this article.
— Tara Bannow, The Bulletin
St. Charles Health System was among only three nonprofit hospitals and health systems serving Oregon that paid its boards of directors in 2012.
The other two, Kaiser Foundation Hospitals and Providence Health & Services, are multibillion-dollar operations with dozens of hospitals across the country.
The question of whether hospitals should pay their board members evokes an array of ethical stances. Some view serving on a board as a way for accomplished individuals to give back to their communities, and believe it should be done only on a volunteer basis. Others counter that being a director requires a great deal of time and specific expertise, and offering compensation can help hospitals build the strongest boards possible.
The former view prevails in Oregon and nationally. The Bulletin reviewed the 2012 tax filings — the most recent year for which such documents are available — of 30 nonprofit hospitals and health systems in Oregon and found only three, including St. Charles, paid their directors. (Six smaller hospitals were not included because their documents could not be obtained.) Nationally, 16 percent of nonprofit hospitals and health systems paid their directors last year, up from 15 percent in 2011, according to a survey by the Governance Institute, an organization of hospitals and health systems that studies health care trends.
St. Charles’ directors voted unanimously in 2010 to start compensation at the beginning of 2011, but not before extensive debate over the pros and cons of doing so, as well as the go-ahead from an external consultant, said Board Chairman Thomas Sayeg, who received $22,000 for serving as a St. Charles board member in 2012.
“The critical factor for the board was the recognition that it was becoming more and more difficult to attract new, highly qualified board candidates and even to retain some of the experienced board members that we had on the board,” he said.
Directors are being asked to devote increasing amounts of time to the organization as it struggles to adjust to new state and federal government regulations, Sayeg said.
“The compensation, we believed, would be a way to help recognize the significant time commitment that these members have to devote to serving on the board,” he said.
‘A heck of a vacation’
St. Charles directors made between $7,500 and $27,500 in 2012. Their earnings totaled $145,000 that year, a nearly $36,000 increase from 2011, which Sayeg said was likely because fewer board members rejected pay in 2012.
Director Megan Haase, the CEO of Mosaic Medical, and former director Jill Hoggard Green, currently the chief operating officer of Mission Health in North Carolina, declined compensation in 2012.
They did the same in 2011, as did director Dennis Dempsey and former director Robert Gould.
Declining pay is no longer an option under a rule that took effect last year. Sayeg said the board became concerned about people’s perceptions upon learning that only some directors are paid. Directors imagined the public thinking those who are not paid may lack qualifications or competence, or that they weren’t showing up to meetings, he said.
“We decided everybody needs to take a fee,” Sayeg said. “What they do with the fee after they receive it is up to them, whether they want to donate it back to the (St. Charles) Foundation, they can do that. If they want to give it to other charities, they can do that. It’s really up to them.”
It’s possible that some board members donated the money they received in 2011 and 2012 to the Foundation, but that information would not be publicly reported, a St. Charles representative said.
St. Charles pays board members a flat fee based on the number of meetings they attend plus additional money for each committee they chair, Sayeg said. An independent group of community leaders proposes the fee rates and the board approves them, he said. Sayeg said he could not recall the names of the members of that group, and a St. Charles spokesperson later declined to provide the names.
The amount St. Charles pays its directors appears to exceed that of other hospitals and health systems. According to the Governance Institute’s survey, 74 percent of the nonprofit organizations that paid their directors last year did so at a rate of less than $5,000 per person.
Bruce McPherson, president and CEO of the Alliance for Advancing Nonprofit Health Care, said he adheres to the philosophy that board members should be paid the equivalent of the cost of a nice vacation for themselves and their families — just enough to express appreciation.
Reviewing the amounts St. Charles’ directors make, McPherson said they’re on the high side of what he believes is appropriate.
“Obviously, that’d be a heck of a vacation for yourself and your family,” he said.
Ken Ackerman, the chairman of Integrated Healthcare Strategies, a Minneapolis-based consulting firm, countered that St. Charles’ board compensation is comparable to that of other nonprofit hospitals he works with.
“I don’t think what Bend is compensating is out of line with what we’re seeing,” he said. “You get some of the biggest systems compensating in the area of $60,000, $80,000, $100,000 — and that’s still a lot less than publicly traded companies.”
Kaiser Foundation Hospitals, a nearly $18 billion enterprise that operates 36 hospitals in the U.S. including Sunnyside Medical Center in Clackamas and the Westside Medical Center in Hillsboro, paid its directors a combined total of about $2.5 million in 2012. Directors made an average of $223,000.
Kaiser spokesman Michael Foley emphasized that Kaiser’s directors oversee the largest private health care delivery system in the U.S.
“One hospital in the report is a teeny fraction of the national organization,” he said. Westside Medical Center is new and was not included in the 2012 tax report.
Sayeg emphasized that in addition to the actual time they spend at meetings, board members must spend time preparing for the meetings and attending continuing education seminars. For Sayeg, he said it adds up to between 10 and 15 hours per week. St. Charles’ tax form indicates Sayeg’s fellow board members worked between one and 10 hours per week in 2012.
“I think it’s very reasonable,” Sayeg said of St. Charles’ director compensation.
Making cuts elsewhere
St. Charles’ decision to compensate its directors comes at a time when the health system is making cuts elsewhere to keep its head above water financially.
In December 2013, officials announced the elimination of two top administrative positions, including former St. Charles Bend CEO Jay Henry, with more to follow in a restructuring designed to cut expenses by $5.2 million.
Leaders said the move was necessary for St. Charles to meet its budget goals for this year. They attributed the financial strain to a fluctuating patient population that resulted in less private insurance reimbursement — the highest paying kind — and more Medicaid and Medicare reimbursements. Medicaid, known here as the Oregon Health Plan, typically pays at a rate of 20 cents for every dollar spent providing care; Medicare is higher, but does not rise to the level of private insurance.
The number of Medicaid patients St. Charles sees is expected to rise following Oregon’s Medicaid expansion, under which Central Oregon’s Medicaid population swelled to more than 42,000 people.
St. Charles has also struggled under Medicare’s new system of rewarding or penalizing hospitals based on 24 quality measures, which look at effective care, patient satisfaction and death rates. Both St. Charles Bend and Redmond are receiving less payment than usual from the Medicare program through September. This is its second year of penalties under the 2-year-old program.
The increased government oversight has prompted St. Charles’ staff to restructure how the health system documents care. For the board, that has meant creating an integrated delivery system — a project it’s been working on for the past four years, Sayeg said.
“It’s taken a significant amount of time to revamp the system to adequately report to the federal and state agencies,” he said.
After reviewing St. Charles’ performance on Centers for Medicare and Medicaid Services quality measures — things like readmission rates, handling of heart attack patients and mortality rates — University of Michigan Public Health Professor John Griffith concluded that the health system appears to be “a pretty mediocre proposition.”
“They aren’t exceptional in anything that I detected,” he said. “They are rarely much different from the average. So, A, I’m paying money when nobody else in Oregon is paying money and, B, there is no evidence I’m getting anything for that money.”
The only situation in which Griffith said he believes paying directors is justified is to include members of disadvantaged groups that would need financial assistance to take time away from their jobs. Wealthy people, by contrast, can afford to contribute their time, he said.
“It’s used as a device to allow representation from, say, the local hospice or the battered women’s shelter — perspectives that might be hard to get from the usual crowd of corporate leaders,” he said.
St. Charles’ board, which includes a lawyer, banker, investment adviser and doctors, does not appear to fit that bill, Griffith said.
More rules = bigger job
Without question, the job of a typical hospital director has grown increasingly complex in recent years, especially under the barrage of new federal regulations brought by the Affordable Care Act.
“The expectations of what we have to read, understand and the meetings and the trainings we have from 2001 to now have grown exponentially,” said Dennis Dempsey, a St. Charles board member. “It’s amazing.”
Dempsey, who serves as Central Oregon supervisor for the University of Oregon, received $27,500 for his role on the board in 2012, making him the highest paid board member that year. He said that was because he chaired multiple committees.
Before the board finally voted in 2010 to pay its directors, Dempsey said the issue would come up annually for six or seven years as the health system grew from one to four hospitals. As the workload increased, he said it became increasingly difficult to attract and retain people with the level of experience the board needed, he said. It’s not unusual, for example, for members to have to read 250 to 300 pages before a meeting, Dempsey said.
Regardless, it’s important work, and the board members do it because St. Charles is a “treasure to the community” that ultimately will care for their friends and family, he said.
“Nobody gets into this to make any money,” Dempsey said. “The whole idea was to help.”
Several other board members did not return The Bulletin’s requests for comment. Reached by phone, Knute Buehler, a board member and orthopedic surgeon with The Center: Orthopedic & Neurosurgical Care & Research in Bend, said Sayeg should speak for the board on such policy issues.
A growing trend?
Several industry experts interviewed for this article said they predict the number of hospitals and health systems that pay their board members will increase in the coming years. So far, the ones that do pay tend to be larger operations. Health systems with hospitals in Oregon that pay their directors include Kaiser Foundation Hospitals, a nearly $18 billion operation that runs 36 hospitals throughout the U.S., including two in Oregon, and paid its board members a combined $2.5 million in 2012. Providence Health & Services, which operates eight hospitals in Oregon, paid its board members a combined total of $227,000 in 2012. Each director receives $15,000 plus additional money for serving on committees.
Not only that, there’s the rapidly changing insurance industry, state regulations and countless other considerations, Sayeg said. The changing environment makes it all the more imperative that the board has directors with the law, business and financial expertise necessary to manage the health system’s complex transactions.
“We need a much broader expertise at the board level to be able to handle the issues that we’re facing,” he said.
Sayeg, for example, is managing partner of Karnopp Petersen LLP, a law firm in Bend that specializes in several practice areas such as corporate finance, taxation and real estate. Fellow director Lauri Miller, whom St. Charles paid $22,500 in 2012, is a real estate agent who served for years as chief financial officer for Eagle Crest Resort in Redmond. Director Doug Downer is the president of Sundowner Capital Management, a local investment advisory firm.
Attracting the best board possible, as well as directors who are in it for the long haul, requires offering an incentive, Sayeg said.
While offering compensation might draw directors, it’s not clear whether it motivates them to work harder as organizations get bigger and issues more complicated, said John Combes, senior vice president of the American Hospital Association and president of the Center for Healthcare Governance, an organization that advises hospital boards and executives.
“I don’t know there’s any evidence to suggest that compensation will increase their productivity or engagement,” he said. “I think it may attract them to come on, but engagement and productivity is usually generated by your interest in the mission of the organization.”
Combes said he thinks paying board members makes sense in some cases. It’s a way for hospitals to recognize the time their board members devote to the organization.
“You are losing time from your vocation to take care of a very important community asset,” he said. “Yes, we love to see volunteerism, but I think the caliber of people that we need to govern our organizations has gotten so much higher, and those people are limited and very busy. Sometimes compensation is needed to make sure we respect their time and their other work.”
Ackerman, of Integrated Healthcare Strategies in Minneapolis, said he has found that directors view each others’ responsibilities differently when they know they’re being paid, and end up being more critical of one another’s performance. It’s not uncommon for paid directors to ask underperforming directors to leave, which he said almost never happens on a volunteer board.
“The excuse is, ‘You get what you pay for,’” Ackerman said, “and they’re tolerant to a fault at one another.”
One thing Sayeg said is true of all of St. Charles’ directors: The pay isn’t what made them decide to be on the board.
“Our board believes in the St. Charles system,” he said. “They believe in the delivery of health care and they’re all there for one reason, and that really is to improve the delivery of health care in Central Oregon.”
— Reporter: 541-383-0304,