DALLAS, Texas (May 10, 2009) – Hospital CEOs have a tough job. Not only do they run what are among the most complex of all American businesses, but now they are hearing the drum beat of criticism concerning their executive compensation at a time when hospitals are facing serious economic challenges. Oh yes, and do not overlook the very real possibility that the healthcare delivery “system” as we know it may undergo game-changing reform.

There is no question that some of the backlash now aimed at hospital CEO compensation is an extension of Main Street’s angry disdain for over-the-top compensation plans that have flourished on Wall Street for more than 20 years. Nor should we overlook the fact that this populist-inspired indignation over how much not-for-profit CEOs make is tied to a recently released IRS study that showed that many not-for-profit hospitals (read: tax-exempt) apparently do less than a stellar job of communicating to their stakeholders the extent of their “community benefit” – charity care, free wellness clinics, etc.

The crushing effects of our national economic fiasco are making running a hospital even more daunting these days. An east coast client said recently that he had never seen a recession impact hospitals so dramatically so quickly. Panicky governors and legislators are slashing Medicaid reimbursement and funding for other state administered safety net programs at a time when more and more of our citizens are without jobs and the ability to pay for their healthcare. Many hospitals are feeling the financial pain. Investment income, which has carried far too many hospitals into profitability for far too long, was a victim of the 30 to 40 percent decline in stock market values.

CEOs are caught in the vise of having to produce reasonable financial returns – to fund charity care, replace aging facilities and equipment as well as upgrade to the latest technology – and this surge of political populism and the federal government’s new-found regulatory zeal that, at times, seems to treat the complex operating challenges confronting community hospitals as little more than a weak excuse for not giving away more free care.

Standing nervously in the wings are the bond reinsurance firms who are at risk for billions of dollars in tax-exempt securities issued by many of these hospitals to build more efficient facilities and acquire the latest technology in order to remain competitive with their investor-owned competitors. While the bond insurance companies understand the importance of the IRS community benefit requirements, what they really care about the most at this moment in history is not having to write a really big check because a hospital defaulted on its bond obligations that they agreed to insure.

Dozens and dozens of hospitals, from New York to California, are on the verge of violating bond covenants, industry analyst warn. If a hospital’s finances deteriorate beyond the point of a technical default, the bond insurers can, and probably will, pull the trigger, exercising their right to replace existing management teams with more expensive turnaround experts who will first do whatever it takes to protect their client – ultimately the bondholders – not the community.

Yes, running a hospital is a tough job. One key to successfully reforming healthcare will be our ability as an industry to attract the best and brightest graduate students, many of whom heretofore flocked to Wall Street or Silicon Valley. C-suite compensation plans that recognize that there is enormous competition for the best leadership talent are essential if our future generation of healthcare leaders will be up to the challenge.

I would like to know your thoughts on this important issue. Email me at jgself@johnmarch.com or leave a comment here on the blog.

John G. Self is Chairman and Senior Client Advisor of JohnMarch Partners. He is a Co-Founder of the Firm. A former investigative reporter and crime writer with more than 30-years of healthcare leadership experience in public relations, national marketing, business development and as Chief Executive Officer of hospitals and consulting firms, Mr. Self is highly regarded for his keen insight into operations, business culture and for his ability to consistently select the right leaders. You can contact Mr. Self at 214.220.1234 or JGSelf@johnmarch.com. Or you can follow him on Twitter at Self_JohnMarch.em>

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