How Rising CEO Pay Could Be Affecting Hospital M&A

A new study suggests leaders of health systems are personally incentivized to pursue consolidation.

As CEO salaries at health systems continue to rise, compensation may be influencing the appetite for hospital mergers.

Being at the helm of a larger health system has garnered an increase in pay in recent years, indicating that CEOs are rewarded for consolidating, according to a study from Rice University’s Baker Institute for Public Policy.

Researchers analyzed compensation data for 1,113 hospitals and nonprofit health systems in 2012 and 868 organizations in 2019 using IRS filing information and hospital statistics.

The average salary for CEOs of independent hospitals was $996,000 (adjusted for inflation) in 2012 before climbing 30% to approximately $1.3 million by 2019. CEOs at health systems with over 500 beds experienced an even greater pay raise, from 144% more than their peers at hospitals with fewer than 100 beds in 2012 to 170% more by 2019.

Nearly half (44.5%) of the increase in compensation was for CEOs who led smaller hospitals that reported no profits and offered no charity care, suggesting that performance wasn’t a major factor. However, the study noted that the rise in pay in those cases could be due to improvements in care quality or justified by the increased complexity of leading a hospital or health system.

Meanwhile, 28.5% of the compensation increase was mostly attributed to higher pay generosity for CEOs at systems with over 500 beds, with much of the remaining 27% of pay rise going to CEOs who guided larger and more profitable health systems.

“Our findings suggest that CEOs may be incentivized to consolidate health care systems in order to reap the financial rewards of leading a larger, more profitable health care system,” Derek Jenkins, lead author of the study and a postdoctoral scholar in health economics at the Baker Institute, said in the news release.

Boards governing hospitals and health systems recognize that CEOs must be paid competitive salaries to meet the demands of running an organization in the wake of the COVID-19 pandemic.

With 2023 seeing a 42% increase year-over-year in CEO turnover, leaders are seemingly sticking around in one place for less time than they did in the past. A hefty salary can go a long way to locking down a CEO for years, providing organizations with continuity.

Still, decision-makers at hospitals should consider what goes into calculating their CEO compensation figures. Tying pay raises to quality and performance instead of size of the system would allow organizations to spend their money in a more constructive way.

Vivian Ho, co-author of the study, chair in health economics at the Baker Institute, professor of economics at Rice, and professor at Baylor College of Medicine, said: “The factors that hospital boards use to structure CEO compensation may be contributing to the affordability crisis in American health care and should remain in the forefront of the minds of policy makers.”