Compensation for top health-care executives is booming in Rhode Island, raising questions about whether the hospital consolidations of the mid-'90s produced promised savings or merely added another expensive layer of bureaucracy to the industry.

Leading the pack is George Vecchione, who, as CEO of Lifespan, the largest health-care network in the state, received $1.5 million in compensation in 2000. Coming in second with $676,136 was John Hynes, CEO of Rhode Island's second-largest hospital network, Care New England, which is significantly smaller than Lifespan. The CEOs of two hospitals also collected more than half a million dollars in compensation -- which includes salary, pension, health and life insurance, and other benefits -- in 2000: Thomas Parris ($670,789) of Women & Infants Hospital, and Joseph Amaral ($504,866) of Rhode Island Hospital.

Representatives of Lifespan and Care New England say consolidation has delivered enhanced efficiency and other benefits. But the large pay and benefit packages, based on the most recently available figures, renew concerns that Rhode Island's hospitals and health-care networks are spending too much money on administrative costs.

"A $1.5 million package is exorbitant for the CEO of a health-care system that needs tremendous infrastructure repair," says Linda McDonald, president of the United Nurses and Allied Professionals, which represents 1800 nurses and technicians at Rhode Island Hospital. Lifespan hospitals also need more direct patient care staff, she says, from nurses to transport workers. Calling Lifespan "a drain" on its member hospitals, McDonald points to the return of some bureaucratic functions to individual institutions in contending that initially projected savings "have not been as great as had been hoped."

Formed in 1994 by the merger of the Miriam Hospital and Rhode Island Hospital, Lifespan now includes Newport and Bradley hospitals, Home and Hospice Care of Rhode Island, VNA of Rhode Island, and Boston's New England Medical Center. Care New England consists of Kent County Memorial, Butler, and Women & Infants hospitals.

Vecchione runs a much larger health-care system, so it's not surprising that his $1.5 million compensation package is much greater than Hynes'. But Vecchione collected almost twice as much in salary and benefits as the CEOs of two larger and more prestigious hospital networks in Massachusetts.

Partners Health Care System, for example, is the largest health-care network in Boston. Its member organizations include the renowned Massachusetts General and Brigham and Women's hospitals, plus five others. Spokeswoman Jennifer Watson says Partners had operating revenues in 2000 of $3.3 billion, or almost three times Lifespan's revenue. Yet the compensation for Samuel Thier, Partners' president and CEO, was $856,663 -- nowhere near Vecchione's.

A Phoenix survey of federal tax returns filed by Rhode Island's 13 hospitals indicates that compensation for local CEOs is considerably higher than the national average (see chart, page 11). According to a national study reported in Hospitals & Health Networks magazine, the average figure in 2000 for a hospital CEO was $230,000. A second survey of 299 CEOs, reported in Modern Healthcare magazine, indicated an average $225,000 pay and benefits package in 2000. Neither magazine includes figures for network CEOs, like Vecchione and Hynes, who have greater responsibility in overseeing the management of a variety of health-care entities. Even excluding their figures, the average compensation for a hospital CEO in Rhode Island was $362,095, far more than the national average.

Hospital officials in Rhode Island defend their corporate compensation, arguing that pay and benefits are higher in the Northeast. The Modern Healthcare survey confirms this, but it found that the Northeast average is $250,400 -- still far less than the Rhode Island average.

Nationally, according to the trade magazines, a scarcity of top hospital executives is fueling average annual raises that far exceed those received by other hospital personnel. Hospitals, they report, are paying more to retain their top executives as headhunters search to fill vacancies. In any case, the '90s were certainly good for health-care CEOs in Rhode Island. Since 1993, before the mergers began, the average compensation package for a hospital CEO in the state has risen 46 percent, from $248,641 to $362,095, or almost six percent a year.

The leadership at many local hospitals has changed in recent years, but those officials that retained their top jobs received collective increases of more than $100,000. The biggest beneficiary was Hynes, whose pay soared 180 percent, from $241,494 as CEO of Kent County Memorial Hospital in 1993, to $676,136 as the chief of Care New England in 2000. Five other CEOs who have kept their positions since 1993 also collected huge increases in compensation: Parris of Women & Infants (up 111 percent); St. Joseph's John Keimig (up 77 percent); Westerly's Michael Lally (up 63 percent); Roger Williams' Robert Urciouli (up 61 percent); and Memorial's Francis Dietz (up 55 percent).

Not surprisingly, larger hospitals pay more. A hospital with revenues greater than $200 million, for example, according to Hospitals & Health Networks, pays its CEO an average of $320,400. Only Rhode Island Hospital, with revenues in 2000 of $463 million, falls into this category. Yet Amaral, the CEO of Rhode Island Hospital, earned $504,866, 58 percent more than the national average. Hospitals & Health Networks also reports that CEOs at hospitals with revenue in the $50 million to $99 million range received an average annual compensation package of $215,00. Each of the CEOs at hospitals in Rhode Island, even those at the small Butler and Bradley hospitals, exceeded this average.

It remains unclear why compensation for health-care CEOs is so high in the state. Alan Sager, a professor at Boston University's School of Public Health, notes that Rhode Island spends more on health-care per person than all but three other states. Massachusetts spends the most, and Sager suggests that the high salaries for CEOs at Boston hospitals may push compensation up in Rhode Island. The intricacies of health-care financing in the United States make the CEO's job unnecessarily complex, he says, but Sager also notes that Vecchione's $1.5 million pay and benefits package "is the largest I've seen in the region."

Vecchione came to Lifespan in 1998, when he assumed control of the financially troubled institution from William Kreykus. Vecchione, an intelligent and articulate executive known for his impeccable attire, had previously been second-in-command at New York and Presbyterian Healthcare System in New York City. He received $200,000 from Lifespan in 1998 for consulting and an additional $278,243 for serving as CEO for the final month of that fiscal year, according to tax returns. Vecchione collected $923,173 from Lifespan in 1999, and he broke the $1 million mark in 2000, receiving $1,558,376.

Vecchione declined to be interviewed, and Lifespan spokeswoman Jane Bruno refused to comment on the health-care giant's wage rates. She did, however, provide a prepared statement. In 2000, Vecchione, received a base salary of $746,065, according to the statement, plus "performance incentives" of $119,846, retirement benefits of $300,309, a health, dental, and life insurance package valued at $27,467, one-time moving expenses of $195,253, and "a loan forgiveness for loss of effectively earned, not vested benefits" from his previous job equal to $206,152. In addition he continued to receive the benefits of a $478,000 loan from Lifespan, which he received, at five percent interest, in October 1998.

The $1.5 million package, according to the statement, "fell below the 75 percentile" in a survey conducted by Lifespan's compensation consultant, Towers Perrin. The statement also includes praise from Lifespan's since-deposed chairman, Barnet Fain, who says Vecchione "is meeting the expectations of the Lifespan board."

Yet in addition to Thier, the CEOs at other major health networks in Massachusetts also received far less than Vecchione. CareGroup of Boston, which includes Beth Israel Deaconess Medical Center, New England Baptist Hospital, and four other hospitals, was the area's second-largest such system, with revenues in fiscal 2000 of $1.279 billion. James Reinertsen, the network's since-departed president and CEO, received $767,239 in compensation that year, according to a tax return.

The third-largest system, Caritas Christi, is owned by the archdiocese of Boston and had revenues in fiscal 2000 of $850 million, from St. Elizabeth's Medical Center in Boston, St. Anne's Hospital in Fall River, and four other hospitals, according to spokesman Richard Doherty. Caritas CEO Michael Collins, who doubled as the network's head and president of St. Elizabeth's, received $806,589 in salary and benefits.

Finally, John Day, president and CEO of Southcoast Health System, a Care New England-sized, three-hospital network that includes Charleston Memorial Hospital in Fall River and St. Luke's Hospital in New Bedford, received $664,652 in compensation in 2000, according to the corporation's tax return.

Despite the difference in compensation packages, Vecchione wasn't alone in receiving more than $1 million from Lifespan. Kreykus, his predecessor, received $1,303,916 in 2000 as the final installment of a two-year non-competition agreement made when Vecchione replaced him in 1998, according to Lifespan's tax return. "Not bad for doing nothing," quips McDonald. Of the $1.3 million, $348,159 was disclosed on previous tax returns, according to an Internal Revenue Service form. Kreykus also received $150,000 for "professional services" in 2000 and $140,000 for the same reason in 1999, the tax return reports.

In 1998, Kreykus's final year as CEO, he was paid $2,979,352, according to the tax return, including $522,138 in deferred compensation reported on previous tax returns. Kreykus is no longer on the Lifespan payroll, Bruno says.

Former Butler Hospital CEO Frank Delmonico still advises his old employer. Delmonico received $196,863 in 2000 as a "20-hour consultant," according to Butler's tax return.

Two other Lifespan executives are reported drawing large pay and benefit packages in 2000. Treasurer David Lantto collected $484,540 in salary, benefits and expenses, while Kenneth Arnold, Lifespan's secretary and senior vice president general counsel, pocketed $327,488. Arnold also received a $24,000 loan at five-point-six percent interest from Lifespan in 1999, according to the tax return.

The level of compensation raises questions about whether Lifespan and the smaller Care New England network benefit consumers. In the mid-1990s, hospitals in Rhode Island engaged in a merger frenzy, starting when Lifespan was created through the marriage of the Miriam and Rhode Island hospitals. The prevailing wisdom at the time was that hospitals had to form large organizations to effectively bargain for reimbursement rates with insurance companies. In the era of managed care, the thinking went, big provider networks could win decent fees from insurers. Smaller community hospitals like Pawtucket's Memorial Hospital or Woonsocket's Landmark Medical Center would be bankrupted when huge insurance companies made deals to funnel patients to network hospitals.

Lifespan and Care New England weren't the only organizations wooing hospitals in the '90s. A for-profit hospital chain, Columbia/HCA Corporation of Tennessee, made a bid for Roger Williams Medical Center, and Tenet Healthcare Corporation of California almost purchased Landmark. But the for-profit corporations were scared off in 1997 when health-care activists convinced the General Assembly to pass a law barring them from owning more than one hospital in Rhode Island.

Officials with Lifespan and Care New England hailed the creation of these networks as a step forward for health-care that would yield savings by merging administrative departments, pooling purchasing, and eliminating duplication. Like Vecchione, Care New England CEO John Hynes declined to be interviewed, but the network faxed a short statement, claiming that its joint operations save $12 million a year "through revenue enhancements, and cost savings or cost avoidance," sustaining programs, like weight loss and home health-care, that are poorly reimbursed by insurers.

Lifespan also boasts of providing major benefits to its member hospitals. A new $1.5 million automated laboratory at the Miriam processes tests more quickly, reports them through the computer system and reduces human errors, officials say. The network's LifeLinks computer system ensures that doctors, whether at home, in the office, or at the emergency room, have immediate access to a patient's file, notes Bruno. The system is meant to enhance coordination among physicians and flags possible drug interactions and errors in dosage, helping to prevent mistakes. Lifespan has brought research dollars to the state, Bruno says, and member hospitals save as the network handles legal, accounting, public relations, personnel, and other functions, eliminating the need for administrative staff at each institution.

In return, Lifespan collects considerable management fees from its subsidiary hospitals and health-care providers. In 2000, according to its tax return, the network collected $113.5 million, or 95 percent of its revenues, from affiliates. But it's unclear if the savings outweigh the costs of the network bureaucracy.

John Donohue, chief of the Rhode Island Department of Health's office of health systems development, has repeatedly listened to networks claim that bigger is better and cheaper, but he notes, "We haven't done any independent analysis . . . about corporate overhead." He adds, "It is often difficult to quantify actual dollar savings from the various initiatives and cost savings they've represented."

BU's Sager is more blunt about the alleged savings produced by Lifespan-like networks. "The evidence is non-existent," he says. Some savings could have been made without merging hospitals, he suggests, by creating cooperatives to win better prices from food and supply vendors.

A former senior Lifespan executive, who requested anonymity, says the creation of Lifespan, whose corporate offices are housed in the Coro Building in Providence's Jewelry District, has done nothing for health-care. "What do they do in the Coro Building besides hold meetings?" asks the former official, adding, "In all honesty, I couldn't see what [Lifespan] was contributing." Also, in a 1999 op-ed piece in the Providence Journal, Alan Weiss, a former Lifespan consultant, criticized the health-care corporation for retaining unneeded administrators.

LIFESPAN'S first top executive was Rhode Island Hospital CEO Kreykus and the second-in-command was Miriam Hospital CEO Steven Baron. But when Vecchione took over, he realized the two flagship hospitals were floundering and he appointed individual CEOs for each in April 2000. Doctors and McDonald, the union official at Rhode Island Hospital, praise the move, in part since Amaral and Memorial CEO Kathleen Hittner are physicians and because it represented a move toward decentralization. But it also formalized Lifespan as a separate layer of bureaucracy placed over normal hospital administration.

While Bruno argues that Lifespan's management ability has saved millions for its member hospitals, the network has also made some unpopular business decisions. Most notable are the 1997 acquisition of New England Medical Center (NEMC) in Boston and the purchase of the Coro Building from a limited partnership headed by controversial developer Richard Baccari in 2001.

The NEMC deal committed Lifespan to send $86.2 million to the Boston hospital in the form of annual payments of $8.7 million. Made in the midst of the hospital merger-mania period, the deal was described as providing Lifespan with more bargaining power to win good payments from insurance companies. But the continued diversion of $8.7 million to Boston each year has led some to question whether charitable donations to Lifespan hospitals will improve health-care in Rhode Island or merely be shipped north to pay the NEMC debt.

The NEMC purchase caused Lifespan another expense, according to the 2000 tax return. In addition to the $8.7 million payment to NEMC that year, Lifespan sent $2.9 million to New England Medical Center International, a health-care management consulting company that is now dormant, and paid an additional $630,530 for the organization's expenses. The $3.5 million tab, says Bruno, went toward "historical expenses as part of the wind down."

Lifespan promoted the more recent purchase of the Coro Building as necessary to provide space near Rhode Island Hospital for research facilities, laboratories, and offices. But the state health department's Health Services Council questioned why Lifespan was spending $28 million for office space while delaying capital projects, including renovations for cardiac and intensive care units.

The former Lifespan executive is especially critical of the Coro purchase, noting that Lifespan, as the building's main tenant, was in a strong position to negotiate a low-cost lease. Lifespan's explanation of the economics of the purchase is "bizarre," the source says, pointing to the five-year business plan submitted to the health department. At the time of sale, according to the plan, Lifespan occupied 86 percent of Coro's rented space and was paying $16 a square foot. Yet to make the deal work financially, the former executive notes, Lifespan estimated the value of the space at $20 to $22 per square foot.

The former executive also questions Lifespan's purchase of the former Sears building on North Main Street. While some of the property is occupied by Lifespan's Center for Cardiac Fitness, large parts of the property remain vacant.

In addition, the Health Services Council has challenged Lifespan's assessments to Home and Hospice Care of Rhode Island as possibly excessive (see "Hospice agency faces uncertain future," This just in, December 28, 2001), and the entire board of directors of the VNA of Rhode Island resigned in protest last December because of Lifespan's handling of its assets (see "VNA Foundation trustees resign en masse," This just in, December 14, 2001).

The problem with Lifespan, says the former Lifespan executive, "is they have too much money." With the $400 million Rhode Island Hospital endowment continually generating funds, the source says, "whatever you need to do, you could always do." You could hire around troublesome employees rather than firing them, the former official remembers, and you could hire expensive consultants. Difficult financial decisions did not have to be made, the source relates, because endowment earnings could cover up those problems.

That day may be ending, according to hospital financial statements. The net assets of most Rhode Island hospitals, or the value of all property, including endowments, remained approximately the same from 1999 to 2001, but Rhode Island Hospital and Landmark Medical Center suffered major losses (see chart, page 11).

From 2000 to 2001, Rhode Island Hospital's value declined 18 percent, while Landmark's assets declined 79 percent from 1999 to 2001. Bruno says Rhode Island's problems were caused by combined operating losses of $53 million in 2000 and 2001 and a drop in the value of its investments due to a stagnating stock market.

Landmark has been forced to use its endowment to survive, relates Mary Kozik, the hospital's vice president of public relations and development, because of the failed merger with Tenet Healthcare. In preparation for the sale, Landmark reduced its operation, cutting ties with local doctors because Tenet has its own physicians, she explains. But the General Assembly passed legislation barring any company from owning more than one hospital and the deal collapsed.

"It was devastating," Kozik says. "It killed us." Landmark lost another 7000 patients, she adds, when Harvard Pilgrim Health Care of New England went out of business.

Landmark also spent heavily to win government backing for the merger, dropping $1 million on lobbying in 1997 alone, according to tax returns. (Most hospitals only lobby through their trade associations.) Tenet gave Landmark $500,000 to help compensate for the expenses after the deal collapsed in early 1999, according to the 1999 tax return.

Bruno and Kozik say Rhode Island Hospitals and Landmark Medical Center have turned around their financial situations. But whether the compensation of the CEOs that oversee the institutions has continued to grow, despite the hospitals' falling finances, will not be known until they file their 2001 tax returns in August.

Issue Date: July 25 - 31, 2002