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Health care: Executive pay based on complexity of system

FARGO - In all of the hoopla over rising health care costs, one basic fact often gets overlooked: Medical care is a labor-intensive industry that requires a broad spectrum of highly trained professionals.

The Forum examined five large health systems in the region and found that the biggest share of their expenses - ranging from 58 percent to 63 percent - pays employees' salaries and benefits.

During the never-ending debate over how to restrain health care costs and how to expand coverage, the spotlight falls occasionally on executive compensation for those who lead large nonprofit health systems.

Those paychecks can be considerable. Total compensation for the top executives of select nonprofit health systems in the area ranged from $1.9 million for the head of Sanford Health to $412,956 for the president of Altru Health in fiscal year 2009, the most recent year for which figures are available.

In fact, most health care organizations - including the five in North Dakota and Minnesota examined by The Forum - are nonprofits that derive much of their revenue from public payers, including Medicare and Medicaid.

In many cities, the local hospitals and affiliated clinics are the biggest employers, and the institutions both are highly visible and part of the bedrock of the community.

"People in Fargo and Sioux Falls really think the local providers belong to the local citizens," said David Bjork, a senior vice president with Integrated Healthcare Strategies, a consulting firm in Minneapolis that advises health systems.

The six- or even seven-figure salary-and-benefits packages paid to health care executives sometimes elicits the reaction: "What makes anybody think they're worth that much more than the rest of us in the community," Bjork said.

But, he added, "You would find they are paid far less than people are paid in for-profit business."

Hospital and clinic executives often have backgrounds in finance and other business skills that are highly compensated.

"That's the kind of talent you're looking at," Bjork said.

Physicians, especially specialists, often out-earn the executives who run the health care organizations.

For example, at least one physician at Sanford Health earned more than the chief executive officer in the 2009 fiscal year examined by The Forum.

Dr. John C. Vander Woude, Jr., a cardiac surgeon based in Sioux Falls, S.D., earned a base salary of $1,038,461, with total compensation of $2,163,960 reported for the period.

That compared to the $746,924 base salary and $1,872,565 total compensation for Sanford CEO Kelby Krabbenhoft.

Some might assume that the person responsible for the entire organization would be the highest paid, but surgeons and other specialists, who are highly skilled, working in fellowships after medical school, can command top dollar.

"A surgeon is doing complicated work," Bjork said. "If they make a mistake, people die."

Likewise, specialists who are highly productive, performing many operations or procedures, earn top dollar, Bjork said.

More broadly, health care is delivered by an array of professionals - nurses, pharmacists, therapists, technicians - all of whom are well paid by virtue of what they do, Bjork said.

"Everything they do is a customized decision," tailored to each patient, and not subject to the kind of automation that saves labor costs in many industries, he said.

Executives of the five health care organizations declined to be interviewed about their compensation policies for executives and physicians.

Executive compensation reflects the complexity and size of running a health care system as well as the need to meet competition for talent on a regional or national level, said Jerry Jurena, president of the North Dakota Hospital Association.

"They are large, complex organizations," heavily regulated, with financial requirements that are unique to the industry, he said.

"If you want to be competitive, you have to be in the market," with a salary and benefits package that will attract a good executive to lead the organization. "You're dealing with what's the going rate for your people."

As an example, Jurena had headed the Heart of America Medical Center in Rugby, N.D., for 15 years before taking the top staff position with the state hospital association two years ago.

In talking to board members of Heart of America, Jurena believes his successor, recruited from a neighboring state, was paid 15 percent to 20 percent more in order to meet the "going rate" at the time of the hire.

The amount spent on compensation for top executives, measured against the size of the organizations they lead, account for a very small percentage of the total - usually a fraction of 1 percent, Jurena said.

"Executive salaries are minimal when it comes down to the total operation," he said.

Sanford Health, based in Fargo and Sioux Falls, Mayo Clinic, headquartered in Rochester and Medcenter One, Bismarck, declined to make any statements about their compensation policies.

Dick Blair, chairman of the Essentia Health board, based in Duluth, issued a statement:

"At Essentia Health, we offer competitive executive and physician salaries based, in part, on performance indicators. Compensation is directed by our board and is subject to periodic reviews by independent compensation consultants. We are fortunate to have top-notch leaders and physicians in our organization, and we strive to ensure that our salaries reflect both current market data and our staff members' skills and talents."

A spokeswoman for Altru, based in Grand Forks, made this general statement: "The compensation and benefits provided to Altru Health System employees are based on market analysis, experience, performance and tenure."

Although restraining compensation of nonprofit health executives was not addressed in the federal health reform law, financial pressures to contain health costs will have a subduing effect over time, Bjork said.

That's because payers, both public and private, are striving to measure outcomes of health services. In the future, payment for health care will be based more on the results, and less on merely performing procedures.

"They're going to have to figure out how to trim corners," Bjork said of health systems, and roughly 60 percent of those costs are tied up in salaries and benefits.

Patrick Springer is a reporter for The Forum of Fargo-Moorhead. The Forum and the Bemidji Pioneer are both owned by Forum Communications Co.