Senior Executive Compensation, Healthcare Service Quality and Charity Care Provision in Not-for-profit Hospitals

Not-for-profit hospitals operate to provide public benefits, often in the form of health service quality and charity care. To expand health care services to meet growing needs with limited resources, nonprofit hospitals have to rely on donors’ contributions, retained earnings and borrowing as their main sources of capital because they can neither issue equity nor distribute dividends to reward equity-holders. Unfortunately, nonprofit hospitals’ access to capital markets can be very limited, and in recent years, benevolent contributions to nonprofit hospitals have declined; therefore, the ability to generate positive income and free cash flows became vital for hospitals to survive in an increasingly challenging environment (Sloan et al., 1990). The uncertainties and fluctuations in the availability and level of reimbursement from public (Medicare/Medicaid) and private (health insurance) sources also increased the financial risk of nonprofit hospitals and hence created incentives for the pursuit of higher profits (Chang and Tuckman 1988).

Often executive compensation in nonprofit hospital are structured in ways that attract talented senior managers and provide appropriate incentives for them to balance the trade-off between financial and social benefits that hospitals produce. However, paying an excessive amount of compensation to hospital executives not only places a financial burden on the nonprofit organization itself, but also undermines public confidence, hurting the nonprofit heath care sector as a whole. The non­distribution constraint, which is the defining characteristic of nonprofit hospitals, provides a contractual assurance that hospitals will engage in socially useful behavior and managers will not exploit taxpayers and patients to benefit themselves.

This article uses detailed executive compensation data of 1,736 senior managers (353 CEOs, 152 COOs, 281 CFOs, and 143 SVPs) and financial statements of not-for-profit hospitals in Massachusetts, New York and New Jersey in 2014 to examine whether hospital executive pay patterns are consistent with their committed social mission and value. CEOs are paid much higher ($1,115,054) than senior executives with other management titles, and the pay is higher in New York ($724,514) and New Jersey ($707,990) than in Massachusetts ($609,206). We find that the pay level is associated with managing larger sized hospitals and taking higher financial risk. There is no relation between executive compensation and the quality of health care services provided by the hospital, but a positive link between the level of pay and the amount of uncompensated care provided by the hospital.

While the evidence is mixed and somewhat inconclusive, this study can be viewed as providing the fact that some nonprofit hospital executives have been focusing on altruistic activities that benefit their patients and community. To some extent, the evidence reported in this article provides evidence that the regulations that allow for cross-sector comparisons, and set standards and procedures for justifying compensation levels in nonprofit organizations (specifically hospitals) may be actually effective in attracting and promoting the talented managers that can focus on both financial measures and mission fulfillment of nonprofit hospital performance.