CEO pay ratio rule, inequality debate could pressure healthcare

Though still a major source of middle class jobs, healthcare companies, including consolidating insurers and nonprofits, may need to find a way to afford raises for their lowest-paid employees.

Come 2017, most publicly-traded companies will have to make a new disclosure in their regulatory filings: the ratio between their CEO's annual compensation and median employee pay.

The Securities and Exchange Commission voted 3-2 to implement the pay ratio requirement, which was created as part of the 2010 Dodd-Frank financial reform law. The regulatory proposal to implement disclosure received more than 280,000 public comments in support--a sign of the country's evolving debate over a massive wealth gap, record-high executive pay and middle class stagnation.

The debate over the pay ratio was heated. "To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement," as SEC chairwoman Mary Jo White put it.

A number of investors groups and corporate leaders opposed the policy, arguing that the data gathering would be onerous and that mandated pay ratio disclosure amounted to shaming of successful talent. Companies with large international workforces in places with lower costs of living, like manufacturers, might also skew towards higher ratios, opponents warned. Another strand of skepticism would be that the pay ratio disclosure may not actually help narrow the inequality gap.

After publicly-traded companies were required to detail executive compensation, pay only kept rising at the top while stagnating at the bottom and the middle.

"The theory was disclosure would create embarrassment and lower pay," Charles Elson, a corporate governance expert at the University of Delaware, told the Washington Post. "But that was based on the assumption that those who had asked for that kind of money were capable of that kind of embarrassment. And they weren't."

Either way, the movement for corporate reform and fair pay are continuing, and large employers across industries are raising their base wages--the University of California system (to $15), Walmart (to $10) and notably Aetna (to $16)--because as Aetna CEO Mark Bertolini concluded, it's not only hard for people to live on $7.50, $8 or $9 an hour, it can be hard for businesses to do great, more productive work with cheap labor.

The pay increases that American corporate executives have collectively given themselves since World War 2 are fairly huge, as are the problems low-income populations still face trying to get by.

In the 1960s, the average chief executive made about 20 times as much as his or her average employee. (Executives, managers and associates all largely had the same healthcare benefits then, too, as Scott Gottlieb, MD, lamented in a Forbes commentary AMC's "Mad Men.")

Today, that CEO-to-employee ratio is around 300 to 1, and still growing. Between 1978 and 2014, inflation-adjusted CEO compensation increased almost 1,000 percent, while pay for average workers increased only 10 percent in the same period, according to a study by the left-leaning Economic Policy Institute.

The income of the median U.S. household is just under $52,000, and more than half earn less than $41,000. Americans in middle- and lower-income tiers saw relatively small pay increases especially in the last decade thanks to increased health insurance cost-shifting by employers.

Aetna's Bertolini noticed this among the insurance giant's own post-recession workforce, some of whom were using the Supplemental Nutrition Assistance Program or even Medicaid.

"More and more often, I saw people online saying, 'I can't afford my benefits. My healthcare coverage is too expensive,'" recalled Bertolini in an interview with Strategy&.

In tandem, Aetna managers were worried about turnover among customer services and lower-level administrative workers. "After we had looked at a number of options to help our lowest-paid employees," Bertolini recalled, "I finally said, 'How about we just pay them more?'"

Aetna decided to raise it's base pay to $16 an hour, around $33,000 annually full-time, impacting some 5,700 employees getting an average raise of 11 percent. Those and another 1,300 will also be eligible for lower-out-of-pocket health plan costs.

Aetna is expecting to devote about $14 million this year and $25 million next year to the employee raises and expanded benefits, a "low-risk investment" considering the annual turnover costs of $120 million, said Bertolini, who earned about $15 million last year. Aetna is also projecting an operating profit of about $2.4 billion this year.

For Bertolini, the wage hikes are a voluntary solution that more corporations could adopt if they want to curb long-term risk to their business models. Bertolini and other executives read Thomas Piketty's "Capital in the Twenty-First Century," and he saw the backlash against the rich, represented by the likes of Occupy Wall Street, Elizabeth Warren and Bernie Sanders, as potential harbinger of a "scary prospect: massive wealth redistribution through the federal government."

"High compensation for healthcare executives feeds social discontent over the widening disparity in wealth," as David Bjork, PhD, a senior advisor Integrated Healthcare Strategies, wrote in the book Healthcare Executive Compensation: A Guide for Leaders and Trustees.

It may be voluntary minimum wages, pegged to a livable salary, rather than publicized CEO pay ratios, that serve as a proxy for a prosperous American economy paying workers fairly, and it will likely be a challenge many healthcare companies confront, from insurers to hospitals.

Many insurers have both highly-compensated executives and low-paid low-skilled workers, or outsourcing with lower-wage labor, and everything in between in their knowledge-based workforces. Most other insurers have been quiet on the issue of minimum wages, neither disclosing their internal base pays nor vowing to follow Aetna's lead, with some exceptions. In June, nonprofit Tufts Health Plan started paying its employees a minimum of $15 per hour, $1 more per hour than Tufts' previous floor and $6 more than Massachusetts' $9 minimum wage.

Likewise, health systems have non-clinical executives earning multi-million dollar salaries and drawing public scrutiny, as well as many high-paying, middle class and lower-wage clinical and administrative jobs, from physicians to nurses to janitors and billing processors. And they've faced pressure to raise low-wages. Parkland Health & Hospital System in Dallas raised the minimum wage for entry-level employees to $10.25 an hour, while Ascension Health, the nation's largest Catholic health system, is raising its minimum to $11 an hour, which is also the wage floor at the highly successful University of Pittsburgh Medical Center.

Arguably the $2.7 trillion U.S. healthcare system can afford to have all workers in the industry earn a "livable" wage of, say, $30,000 a year, and bring more affordable products and services to consumers and taxpayers. In part, this may come as healthcare restructuring eliminates the need for manual and low-level administrative labor. Part of it may also come from rationalizing executive and management compensation and democratizing the healthcare workforce.

The CEOs of the six-largest for-profit health insurers earned a collective $150 million last year. CEOs of the top four publicly-traded hospital chains earned about $75 million, a large chunk of it in Community Health Systems' CEO Wayne Smith's compensation of $26 million. Anthony Tersigni, Ascension Health's president and CEO, earned $8.5 million in 2013, and UPMC's Jeffrey Romoff brought in $6.5 million. Non-clinical executives at nonprofit health insurers and hospital systems also routinely earn well more than $1 million.

It's hard to argue that the proliferation of such high salaries in non-clinical positions is not at least partly related to America's wildly expensive healthcare system, spending the most per capita of any country while leaving 30 million uninsured and many with mediocre treatment.

Quality for quality's sake

"There's a general case to be made asking whether health system executives are being compensated appropriately to do what they do," said Paul Levy, the former CEO of Beth Israel Deaconess Medical Center in Boston. "I have mixed feelings."

Before coming to Beth Israel in 2002, Levy led the Massachusetts Water Resources Authority's cleanup of the Charles River and Boston Harbor and helped reform a previously dysfunctional, indebted public utility. In his eight years at Beth Israel, Levy was credited with turning the nearly-bankrupt BIDMC into a progressive, transparent and quality-focused health system.

Levy publicized all of BIDMC's quality and safety data (good and bad) on his blog during the mid- and late-2000s, starting a conversation about patient-centered care and threatening the status quo in academic medicine. Some leaders of other teaching hospitals were wary of even disclosing data on their healthcare quality and patient safety. "Can you get Paul to stop publishing those numbers?" one Boston health system chair reportedly asked of BIDMC's chair. "This is bad for academic medicine."

Levy's approach also ran counter to the prevailing hospital management norms in other ways.

"The board wanted to keep giving me raises, because they felt that it was a measure of the status to be able to pay the CEO up in the same range as our competitors," said Levy. "I kept saying, I feel uncomfortable, I'm already earning 10 times as much as an experienced nurse. Maybe I'm too much of a 60s liberal. I turned down several raises, and donated hundreds of thousands back to the hospital, at least a half a million back."

In 2009, amid layoffs in the Great Recession, Levy became famous for deciding that he and his executive team should voluntarily take pay-cuts so that Beth Israel Deaconess could avoid cutting any jobs. Levy gave up 10 percent of his $800,000 salary, and 33 percent of his bonus, and he asked staff at the hospital for their ideas: What could be done to save some money without impacting patient care? Nurses, physicians, and other staff rallied behind Levy, forgoing raises, vacation time, retirement, and ended up saving some 600 jobs and more than $16 million.

In 2005, when Massachusetts' minimum wage was under $7, BIDMC increased its hourly base pay to $10. "There was no market-based reason to change their wages," Levy wrote recently. "Other Boston academic medical centers were also paying their lowest-paid workers--housekeepers, transporters, and food service workers--below $10 an hour. I just thought it was wrong for a healthcare organization, particularly one with a faith-based heritage, to pay people so little."

"It's been my experience that hospital managers often forget about this group of vulnerable workers even though, as you think about it, they have more interactions with patients than anybody else in the hospital. I always found them to represent the heart and soul of organization. As Gloria Martinez, one of our transporters, once said to me and our Board: 'We view our job as providing the kind of care we would want for members of our own family.'"