Nonprofit Hospitals Must Address Administrative Bloat, Physician-Researcher Says

The author of a study examining executive compensation in non-profit healthcare says it's time to ask if a 'self-perpetuating bureaucracy' is worth the money.

The eye-catching lead in a recent study found that CEOs at 22 major nonprofit health systems across the nation saw their compensation nearly double from 2005 to 2015.

The findings show that there exists a widening gap between compensation paid to nonclinical executives and that paid to physicians and nurses, with clinicians on the lagging end.

But lead author Randall E. Marcus, MD, of University Hospitals Cleveland Medical Center/Case Western Reserve University, says this wage gap "is more the symptom than the disease."

"The disease is the cost of all these nonclinical people," Marcus says. "There is no one looking at this closely."

Marcus spoke with HealthLeaders about the study. The following is a lightly edited transcript.

HLM: Why did you do this study?

Marcus: Having been in healthcare for more than 40 years I've seen this growing bureaucracy. There seem to be more administrators running around than people taking care of patients. We were trying to find the data to see if that was true, and we found that by 2015 we had this bloated, self-perpetuating, expensive healthcare bureaucracy.

For every physician on the front lines we are seeing 14 non-physician clinicians; nurses, physical therapists, etc. What was shocking was there was one manager for every physician and 10 nonclinical people. From 2005 to 2015 this bureaucracy has grown substantially. It is contributing way too much to the cost. That's the real takeaway.

HLM: Were you surprised by your findings?

Marcus: Our numbers are probably on the conservative end. When you get the 990s, they hide incentive compensation into one gigantic number for the whole medical center. There are situations where the base salary is less than half of what the overall comp is.  

HLM: What is driving this administrative bloat?

Marcus: Certainly, you need administrators to run medical centers. But when you look at 2005-2015, there were a lot of mergers and acquisitions. You would think that would decrease the numbers of nonclinical people. Our data shows it went the other way.

It's like any other bureaucracy. It tends to be self-perpetuating. I make you the vice president of whatever. You quickly hire an administrative assistant and two deputy assistants and they each have an administrative assistant. That is what's going on.

HLM: Sounds like higher education. Do you see any parallels?

Marcus:  When you have entities that don't have to make a profit, where the bureaucracy is not tied to stock prices and profitability, whether it's education or healthcare, it's hard to control.

HLM: Are you suggesting that clinicians are underpaid?

Marcus: No. We are not suggesting that. We just needed a comparison. So we looked at physicians paid at the higher end, orthopedic surgeons, and physicians paid at the lower end, pediatricians, and we looked at nursing staff.

HLM: Your study challenges the ROI for this administrative bloat. Please elaborate.

Marcus: We thought it was important to look at the overall utilization of healthcare in our country. That has been pretty stagnant over the 10 years of our study. So, when you see compensation and costs of nonclinical workers has in some cases doubled over 10 years when the utilization of healthcare in our country hasn’t changed, that is where we start to question the value.

HLM: Does this wage gap affect morale in hospitals?

Marcus: Where it really comes into play is when they say 'we've got to make budget' and then they look for cuts on the lower, assembly line end. People can look at the hospital's 990 and see the C-suite salaries have continued to increase at very high rates.

It's not just the morale of the employees. The increase in healthcare costs in this country has exceeded 17% of our gross domestic product. So, it should maybe hurt the morale of all of us who are patients and taxpayers.

HLM: How would you fix this?

Marcus: The cost of healthcare is so expensive, and at some point it's something we all need. It is important for us to look at every person, particularly the non-clinicians, that are a tax on the healthcare system and analyze how important they are. Does everyone need three deputy administrators?

You have to pressure nonprofit healthcare into looking at what's going on in every department and with every employee to see if the value is there.

HLM: What would be the best use for your findings?

Marcus: I would hope this study calls attention to a lot of the costs within healthcare. It's important for nonprofit boards, who are often volunteers, to get more involved in the finances of healthcare. These boards are fiduciarily responsible for huge expenditures and costs. So, if our study makes people who serve on these not-for-profit boards more aware of what is going on, then we will have done a service.