A Letter To The Editor By Steven Rumney 6-19-13

PRMC executives receiving million dollar salaries, huge raises and profit incentives at “Not-for-Profit” hospital!

Alan Newberry

Peggy Naleppa

Alan Newberry

Compensation of $1.57 million for fiscal year 07/01/10 to 06/30/11; PRMC tax return for that period does not indicate ANY hours worked. He received $3.6 million in total compensation over the three years (07/01/08-06/30/11) with status in all but six months as “Retired CEO”

Peggy Naleppa

Compensation of $797,212 for fiscal year 07/01/10-06/30/11, about $383/hour. Her salary increased 52.9% in the two years from 07/01/09-06/30/11.

Non-profit hospitals are established with the purpose of providing service to the community and to allow donors to make tax-deductible donations. All Maryland acute care hospitals have “not-for-profit” status under IRS 501(c)(3) code which makes them totally exempt from paying income, property and sales tax. This tax-free status is afforded to hospitals in return for “Community Benefit”. All earnings from the non-profit hospital must be reinvested to improve quality and care of the hospital and is used to fund “Community Benefit” programs including Health profession education, Charity Care (more about this later), mission driven health services, and community health services. 

All spending from the non-profit must be consistent with its charitable goals and that is why disclosure of the compensation packages for executives at these Non-profit hospitals often results in shock and outrage from members of the community and potential donors. Executive pay at these Non-profits must meet the IRS criteria of being “reasonable”. But what is “reasonable”? I think it would be informative to examine the specifics of the compensation structure for executives at Peninsula Regional Medical Center (PRMC). All data has been obtained from publicly available Form 990 corporate tax returns.

PRMC has established the mission statement “To improve the health of the communities we serve” and this is a fine goal indeed but let’s put this in context. Allen Newberry the former hospital CEO earned $1.568 million for the Year Ending (Y/E) 06/30/11 as recorded in the applicable PRMC tax return; and he was not listed as having worked ANY hours! (Found on Form 990, Part VII Section A).

Over the three year period of July 1, 2008 to June 30, 2011 Newberry received compensation of almost $3.6 million with all but six months of this period as a “former CEO”. I have a hard time connecting this incredible compensation for a retired CEO with the hospital’s stated goal to “Improve the health of the communities we serve”. What citizen(s) of our community benefited from this money other than Mr. Newberry himself? Whose health was “improved”?

Peggy Naleppa, the current PRMC CEO also had a very good year in fiscal year 2011. In addition to clearing the table by winning almost every local business, civic, leadership and humanitarian award possible she was compensated quite well by the hospital. 

Naleppa’s compensation as reported on the PRMC 990 return was $797,212 for the Y/E 06/30/11; an increase of almost 53% over the two years ending 06/30/11! In fact ALL top PRMC executives received huge increases in their compensation. A review of the publically available PRMC tax return for the tax Y/E 06/30/11revealed that the combined compensation of five top PRMC executives: Newberry, Naleppa, Cindy Lunsford (COO), Thomas Lawrence (former VP Medical Affairs), and Bruce Ritchie (CFO) increased by 33.2% over the previous year!

The large increase in compensation for PRMC executives contrasts quite sharply with the compensation increases seen by the typical PRMC employee. A calculation of the average hospital salary (using the hospital’s reported “Salaries and other compensation”, line 15 of Form 990 Part I, divided by the reported number of employees, line 5) yields an average employee salary of $53,381 for Y/E 06/30/11 and $52,510 for Y/E 06/30/10 when the top eight most highly compensated executives are removed from the calculation for each year. This means that while the executive team was receiving quite attractive increases during the same period the increase in average compensation for the three thousand remaining hospital employees was a very modest 1.7%. This suggests nothing more than a cost-of-living increase.

In addition the compensation package for some PRMC executives includes membership dues to Health and social clubs (Part IV, Question 12) completely financed with your charitable contributions, tax dollars and insurance premiums. These are not expensive perks but they may present an image problem. It would indicate that the hard economic times experienced by most of the nation have not found their way into the PRMC corporate boardroom! Also it should be recognized that last year while the executive pay at PRMC was soaring the hospital was busy filing lawsuits against more than 2,200 citizens who were unable to pay their medical bills; about six each and every day!

To be sure PRMC executives are not alone in being well compensated. A review of the publicly available set of tax returns (Y/E 06/30/10) for more than 40 Maryland general hospitals revealed that the average hospital CEO salary was about $758,413. And there are a lot of hospital executives who are millionaires. In the same period Maryland hospitals listed 25 executives with annual compensation of over $1 million!

Most Not-for-Profit institutions typically rely heavily on tax deductible contributions from supporters to fund their operations (and also validate their tax-free status) but contributions are a very small component of the PRMC revenue stream. The PRMC tax return for

Y/E 06/30/11 reported that revenue derived from contributions, gifts and grants (Form 990 Part VIII, line 1h) totaled only $173,096 a mere 0.04% of income! Sadly the compensation paid Newberry is more than nine times the revenue from all contributions! Other hospitals do rely more on contributions. The tax return for Atlantic General Hospital for the same period (Y/E 05/30/11) indicates revenue from contributions was more than $1.2 million (about 7 times more than PRMC) which constituted 1.4% of total revenue and more than three times their CEO compensation.

Another disturbing fact found on the PRMC tax return is that the hospital has an executive compensation and incentive program based on the profits of the institution! Part III Schedule J of Form 990 states the following: 

“Officers and key employees of Peninsula Regional Medical Center are paid compensation based on the net earnings activity of the Medical Center and Peninsula Regional Health System.” 

Additionally on Schedule J Part I, Question 6a there is the following question:
 
“Did the organization pay or accrue any compensation contingent on the net earnings of the organization?” 

The response in the tax return is “yes”. 

Something just doesn’t seem right. Why should PRMC, a “Not for profit” institution have an executive bonus incentive program based on profits? Maybe I am confused but I thought their institutional goal was to improve health not improve profits! Remember that Non-profits must spend surplus funds on services and programs. I have only found one other hospital in MD that also has a similar incentive plan. 

This brings up another tough question. What is the measure of performance and compensation for the CEO of a non-profit hospital? In one of the most comprehensive studies on the subject the New Hampshire Center for Policy Studies recently concluded that “there is virtually no correlation between hospital CEO pay and either quality or cost”. Instead the study found that the CEO pay more closely correlates with the size of the institution. Locally what performance metric is used to determine the compensation for a CEO like Naleppa? Is it how well she does in leading the hospital in providing community benefits or is it how successful she is in adding new wings to the hospital, expanding the span and reach of the Peninsula Regional Health System or eliminating all competition? 

It suggests to me that PRMC has an aggressive plan to strangle any competition and achieve complete monopoly position on all health care services either by buying out independent practices and bringing them under the umbrella of the Peninsula Regional Health System or simply putting them out of business. It has been suggested that PRMC has restricted referrals to independent (competing) health care providers; a very strong arm and anti-competitive tactic, potentially infringing on anti-trust law. This might suggest that the executives at PRMC think it is more important to further strengthen their provider monopoly than to provide an opportunity for sick and ill patients to find alternative treatment options. If this is true it is deplorable!

The Peninsula Regional Health System (PRHS) now contains 75 providers in 12 different specialties and is still growing. I don’t see how the market domination by one extremely large provider and a lack of choice in alternative providers will “improve the health” of our community and I can’t understand why the state allows such obvious anti-competitive practices. What I do know is that when these formerly for-profit health care providers become part of the PRHS they become immune from property and income tax, putting more pressure on other local businesses to pick up the shortfall. Also as the revenue of the PRHS increases we may expect to see further increases in executive compensation.

Other than requiring specific reporting guidelines there are no quantitative thresholds required by the IRS on community benefits such as charity care. The state of Maryland doesn’t seem interested in challenging the tax-free status of any hospital. What makes high executive pay all the more disturbing is the fact that in Maryland the “Charity care” component of “Community Benefit” provided by not-for-profit hospitals is really not charity at all. Maryland is the only state where prices for medical procedures at hospitals are determined by a rate-setting committee. The Maryland State Health Services Cost Review Commission (HSCRC) has established the rates that MD hospitals can charge for procedures for all payers including Medicare, Medicaid and the private insured for over thirty years. Uncompensated care, discounted care and even bad debt are all taken into account when the state sets the rate the hospital can charge for procedures. The hospital rate is allowed to increase to cover these previous losses. So where is the “Community Benefit” here? I am sure there are many private businesses that would like to have the state clear up their bad debt!

The question over hospital executive compensation is not only a national issue but we have the same concerns right here in our community. Only state legislators and an outcry from the public may affect any change. Jay Hancock (Kaiser Health Care News, formerly of the Baltimore Sun) recently stated: 

“Hospitals aren't Goldman Sachs. They're not Stanley Black & Decker or Microsoft, either. They're nonprofits, getting charitable donations and huge government subsidies beyond all the loot they rake in from Medicare and Medicaid. If the newly required disclosures on the IRS "Form 990" put pressure on hospital boards and CEOs to tone it down, it's about time.” 

I believe the public deserves to be informed of the facts and somehow PRMC needs to be held accountable for how our local hospital chooses to spend its abundant and growing supply of tax-free money. If you agree with me and find this information disturbing and frustrating as I do, I urge and encourage you to appeal to our legislators on both the state and federal level or contact the hospital board directly expressing your disappointment. 

Someone has to be accountable and answer why this situation is the way it is.