Carolinas HealthCare System releases 2013 compensation for top executives

Jan. 30--Michael Tarwater, the chief executive officer at Carolinas HealthCare System, received $4.9 million in 2013 compensation, a 2.6 percent increase over 2012, according to figures released by the system Thursday.

Tarwater, 60, who has led the $8 billion nonprofit system for more than 10 years, is the highest paid hospital executive in the Carolinas. He received a salary of $1.2 million, two bonuses totaling $2.8 million, and other compensation, including retirement and health benefits, of $864,000.

In 2012, Tarwater's compensation rose 12 percent over 2011, but Edward Brown, chairman of the Carolinas HealthCare board, said the smaller 2013 increase does not reflect any dissatisfaction with the system's leader.

"His performance was just as good in '13 as it was in '12," said Brown, president of Hendrick Automotive Group. "As we took a look at his compensation vis a vis the market, we think it's appropriate"

Each of the top 10 executives at Carolinas HealthCare received more than $1 million in total compensation in 2013. Three got got double-digit increases over 2012, partly because they have taken on extra responsibilities. They are: President and Chief Operating Officer Joseph Piemont, Chief Financial Officer Greg Gombar and Chief Medical Officer Dr. Roger Ray.

Both Piemont and Gombar have absorbed some of the duties of Russ Guerin, an executive vice president who retired last year after 26 years with the system. Guerin, who received total compensation of $1.1 million in 2012, was not replaced, one of the steps the system has taken to "get more efficient," Brown said.

Executive compensation is based on multiple measures that include the system's financial performance as well as quality of care and surveys that reflect the satisfaction of patients, physicians and other employees, Brown said. "We have a very well-defined process for evaluating the leadership team."

Brown is one of seven members of a Carolinas HealthCare board committee that sets compensation for executives. They compare themselves to national hospital systems of similar size, scope and complexity, keeping in mind that they compete with for-profit hospitals for executive talent, Brown said.

"We've got to make sure we have the best leadership team," he said. "We don't want anybody to be lured away....Each one of these leaders could go to work for a for-profit (organization)...Our team stays here because we treat them fairly."

Brown said the board is focused on three things: Maintaining the system's mission to "provide quality care to everyone," having adequate capital to "invest back into our facilities," and keeping "a very focused, highly motivated, energized leadership team."

Consultants provide pay data

Both Carolinas HealthCare and Novant Health, Charlotte's other hospital system, use consultants to guide them in setting executive pay and comparing hospitals.

Integrated Healthcare Strategies, a Minneapolis-based firm that works with Novant's board, surveyed private nonprofit hospital systems, including 52 with more than $1.5 billion in total revenues, in 2013. In those large systems, the median salary for CEOs was $998,900, and the median total compensation, including retirement and health benefits, was $1.8 million. The median salary increase for CEOs was 5.9 percent.

Kevin Talbot, executive vice president with Integrated Healthcare, said the Charlotte systems are among only 30 to 40 nonprofit U.S. health systems with net revenues of more than $3 billion, and they have to provide competitive compensation packages to recruit and retain the best executives. CEOs of the largest U.S. health systems have total compensation packages in excess of $3 million, he said.

"The larger the organization, generally the higher the pay levels for executives," Talbot said. "Boards of very large organizations make decisions using the best available data there is, and then they use their good judgment. That's their fiduciary duty."

Carolinas HealthCare is the second-largest public hospital system in the country and the largest employer in the Charlotte region, with 42 hospitals and 60,000 employees, including 3,000 doctors and 14,000 nurses. The system is a tax-exempt hospital authority, created by state law in 1943. Like other nonprofits, it retains its earnings and reinvests them in expansion and improvements.

Tarwater and other system executives are eligible for two bonuses. One is based on the past year's goals and the second on long-term goals. Other benefits include health insurance, retirement pay and perks, such as Tarwater's permission to fly hospital planes for pleasure. A recent Observer story showed that Tarwater, a licensed pilot, took at least 29 personal flights on the hospital system's planes from 2008 through 2012. He reported an average of $2,475 per year as income attributable to his personal flights in that time.

Non-management employees in Carolinas HealthCare'sCharlotte-area hospitals also benefited from the system's "extraordinary performance" in 2013, officials said. More than 20,000 employees received incentive bonuses of $750 each, and 6,532 more received bonuses of or $450 each. Those bonuses totaled about $18 million, and that was in addition to annual pay raises, which averaged 2 percent.

This week's announcement marks the sixth consecutive year Carolinas HealthCare has disclosed total compensation for top executives. Before 2009, the system released only base salaries. A change in state law required public hospitals to disclose total compensation, not just salaries, of the highest-paid executives. That is the same information that is already available through IRS reports from private, nonprofit hospitals, such as Novant.

Winston-Salem-based Novant has not yet filed its IRS form for 2013. But the 2012 report shows Novant CEO Carl Armato received total compensation of $2.8 million that year, including a salary of $934,520 and bonus of $686,576. Nine other Novant executives received total compensation of more than $1 million in 2012.

Novant is much smaller than Carolinas HealthCare. It reported a $3.6 billion in total revenues in 2012, has about 26,000 employees and owns 14 hospitals in four states.

Critics weigh in

Carolinas HealthCare's compensation announcement comes at a time when health officials, lawmakers and business leaders agree the national health-care landscape is changing rapidly and the cost of medical care is rising at an unsustainable rate.

In 2012, the Observer and The News & Observer of Raleigh published a series, "Prognosis: Profits," which showed how consolidation of hospitals and doctors' practices has contributed to that rising cost by creating large systems that have leverage to demand higher reimbursements from insurance companies.

Nonprofit hospitals in the Charlotte region have posted strong profits, raised prices and built up big reserves even during the recession. For example, Carolinas HealthCare has $2 billion in reserves. Executive pay has continued to rise, and some patient advocacy groups have raised questions about whether that's appropriate for nonprofit institutions.

Ken Berger, president of Charity Navigator, a New Jersey group that surveys 7,000 nonprofits of all types, called the 2013 compensation figures for Charlotte hospital systems "eye-popping."

"I think it's perfectly fine for people to become millionaires if they're working for a for-profit company," Berger said. "But I don't think you should become a millionaire running a (nonprofit) that taxpayers subsidize."

Although he hasn't studied Charlotte hospitals, Berger said he questions "what differentiates them in a meaningful way" from for-profits.

"When I've looked generally, the answer is very little. If that's the case here, I would say ...they should be paying taxes. The reality is that people in most parts of the nonprofit sector understand they're going to take a salary that is not on par with for-profits," Berger said.

Berger said it will be up to the federal government, specifically the IRS, to more clearly define what it means to be nonprofit and tax-exempt and "what is appropriate when it comes to compensation." But he said nonprofit hospitals have a "powerful lobbying group and anytime there are attempts to make change, there's a juggernaut of resistance."

In another critique of the nation's nonprofit hospitals, researchers at Harvard School of Public Health published a study last fall which found that compensation for the CEOs isn't generally linked to quality of care, as they expected it should be.

"We were disappointed that we didn't see any meaningful relationship between mortality rates and CEO compensation," said Dr. Ashish Jha, the study's senior author. "When we look across the country, we find no meaningful relationship between how patients do and how well the CEO does."

Tarwater's compensation is "near the top of the salary range that we saw across the country," Jha said. But an $8 billion health system is also among the largest in the country, so "one is not completely surprised by that."

The Harvard study examined records for CEOs responsible for 2,681 private, nonprofit hospitals and concluded that acquisition of advanced technology played a bigger factor in higher compensation than did quality of care, such as mortality and readmission rates, or the amount of charity care provided.

"We hear a lot about how leaders care a lot about quality," Jha said. "(But) the data tells us that boards are not paying close attention to quality, such as death rates, when they decide compensation."

Focus on patients

Charlotte hospital officials challenged the conclusions of the Harvard research and the advocacy groups.

Spokeswoman Kati Everett said a significant portion of Novant's long-term executive compensation is based on "organizational performance in quality and safety, patient satisfaction, transforming to the electronic health record, financial stewardship and providing community benefit."

Brown, Carolinas HealthCare's board chairman, said quality of care is "a critical component" in determining executive pay. For example, he said the 17 percent increase in compensation for Ray, the chief medical officer, is linked to his increased responsibility for improving quality of care across the system. "His role is going...to be bigger and bigger as the emphasis on quality continues to increase," Brown said.

Hospital officials say they must stay financially sound to provide care for everyone, including free care for those who can't pay.

Carolinas HealthCare officials report the system provided about $1 billion in "community benefit" in 2012, including free and subsidized care to low-income patients. Some of that community benefit includes volunteer work provided by CHS employees for community organizations.

Novant provided $546 million in community benefit.

Most of North Carolina's hospitals spent less than 3 percent of their budgets on charity care in 2010, according to a review by the Observer and the News & Observer in Raleigh. Mecklenburg County hospitals, all nonprofits, performed better than average that year, with all spending more than 4 percent on free care for the needy.

"We have a very well-defined mission to provide quality care to everyone in the communities that we serve," Brown said. "We're trying to figure out, how can we lower the cost of health care, how can we deliver better outcomes. We are never comfortable or satisfied...We want to be part of the process of transforming the delivery of health care in America."

Reporter Ames Alexander contributed.

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