March 18, 2019

Amid hospital-tax debate, frustrated CEO defends his and other healthcare executives' pay

HBJ Photo | Matt Pilon
HBJ Photo | Matt Pilon
Bristol Hospital CEO Kurt Barwis (right) with board Chairman Glenn Heiser. Both are frustrated with Connecticut's controversial hospital tax, which they say is hurting their hospital's finances.

It's not often you'll find well-paid executives comfortable talking about how much they make.

Bristol Hospital CEO Kurt Barwis, who's earned upwards of $1 million in annual wages and benefits in several recent years, depending on how you measure it, is an exception.

Frustrated by Gov. Ned Lamont's recent proposal to increase the state's tax burden on hospitals in the coming biennium, and the past administration's criticism of executive salaries, Barwis and several of his board members sat down with Hartford Business Journal to defend and explain Bristol Hospital and Health Care Group's robust C-suite pay packages, which are common across the country as well as in Connecticut, where nearly 40 hospital execs and physicians make $1 million or more in annual compensation, according to the latest state data.

Unlike his predecessor, Lamont hasn't uttered a word about hospital pay, but Barwis said the topic is always in the background, whether spoken or not.

"I think it's used as part of the leverage," Barwis said of the way his and other executives' salaries are publicized by the state.

As a not-for-profit executive, Barwis said he knows his pay is public record. His gripe is with how he thinks the figures are perceived.

"People look at it and think it's just a big number, and they don't understand what it takes to actually get into this role, how much education and training, how much responsibility there is," he said. "There's not an executive in any of these organizations who's not on a 24-7-365 [schedule]."

It's clear that a tense relationship with Gov. Dannel P. Malloy's administration, which brought back the hospital tax in 2012 — a decade after an earlier version of it was phased out — still sticks in the craws of hospital leaders.

They're worried that Lamont, even if he's been diplomatic in his approach, is returning to his predecessor's policy prescriptions for their industry. The two sides have been in talks over Lamont's tax proposal, which is overshadowed by an ongoing lawsuit hospitals filed in 2016 challenging the hospital tax as unconstitutional.

The stakes are high. Late last year, just prior to departing his role as Malloy's long-time budget chief to become CFO of the state's university and college system, Ben Barnes said the state could be on the hook for as much as $4 billion if it loses in court.

Next year, Lamont's budget would take $516 million more in tax revenue than hospitals expected. While the net impact on hospitals, after a series of corresponding state reimbursements, would only be an additional $43 million above expectations, those losses would hurt hospitals' ability to recruit needed specialists and whittle down deferred maintenance backlogs, said Bristol Hospital CFO Richard Braam.

In addition, hospitals were hit in October by a seemingly unintended drop in inpatient reimbursements, stemming from a tweak to how the state weights Medicaid rates. That's cost Bristol Hospital over $2 million and counting, forcing it to tap an additional line of credit, and delay a plan to annuitize its $25 million pension liability and refund $22 million worth of debt.

Tone shift

In early 2015, a wry remark from Barnes kicked off a particularly acrimonious year.

In a moment enshrined on YouTube, a Republican senator asked Barnes during a committee hearing why Malloy's budget that year called for a higher tax on the "virtuous activity" undertaken by hospitals.

Barnes replied: "It's like why do you rob banks? It's where the money is."

Many in the room laughed, but hospital leaders didn't find his comments funny.

"I wasn't happy about them, I didn't think they were appropriate," said Mark Blum, a Bristol Hospital board member who chairs its compensation subcommittee and recently retired as CFO of Thomaston Savings Bank.

Shortly after Barnes' infamous remark, a fight over Medicaid cuts followed, which led hospitals to attack Malloy in an ad campaign. The Democratic governor doubled down on his rhetoric, mocking hospital's not-for-profit status. He also called hospital CEOs "fat cats" with "outrageous" pay packages and referred to the industry as having a "hospital industrial complex" that was collectively posting a nearly $1 billion surplus.

Lamont knows the history and hopes for a better working relationship with hospitals, a goal that will be harder to accomplish after he proposed to renege on the final year of a 2017 deal that essentially cut in half (from $438 million to $229 million) the annual tax burden on hospitals.

As was originally intended, the tax in 2012 leveraged higher federal reimbursements to the benefit of both the state budget and hospitals. But the state quickly began taking more of the money to help balance its budgets, while hospitals saw a net negative impact — losing out on hundreds of millions of dollars annually.

The 2017 deal was supposed to provide hospitals relief, but Lamont said the state can't afford to cede the revenue. Without his proposed change, the state estimates it would face a net revenue impact of $406.1 million next year as lawmakers try to tackle a $1.5 billion dollar deficit.

"We're in very good discussions with the hospitals, it's a reset of that relationship as well, and we'll see what happens going forward, but this year, [the hospital tax] is staying in the budget," Lamont said after keynoting a recent MetroHartford Alliance event.

The hospital association declined to discuss the Malloy-to-Lamont transition.

Performance review

Blum, Bristol Hospital's compensation committee chairman, said the annual process by which directors decide what to pay Barwis is regulated by strict IRS rules and has plenty of checks and balances built in.

"Our process is run by an outside committee, everyone has to be independent, with no conflicts or financial connection to the hospital," Blum said.

The rules are the same for other not-for-profit hospitals.

That means Barwis can't sit in on the committee's deliberations (though he gets some input when it comes to the pay for his top deputies), and has no control over hiring or firing consultants the committee retains each year to scour the U.S. hospital market and determine CEO pay ranges at comparable institutions.

That process helps define the salary goalposts. The next step is determining the extent to which Barwis met the board's previously set financial targets and quality goals in the recent year. The goals can be tough, and hitting them all is uncommon, but if that happens, Barwis can receive a bonus of up to 35 percent of his salary. That means his compensation tends to fluctuate.

According to a 2017 IRS filing, Barwis earned $751,424 in salary and fringe benefits, while the health system booked $174 million in revenue.

Glenn Heiser, Bristol Hospital's chairman, said the board's aim is to keep the best possible management in place running the health system.

"There's competition out there," Heiser said. "There's not many people who can run an organization at the CEO, COO or CFO level."

John Lodovico Jr., vice chairman of Bristol Hospital's board, said Barwis deserves the money he earns.

"With Kurt's caliber, I'm surprised he hasn't been recruited out," he said.

With insurance contracts changing and overall financial and regulatory complexity increasing, qualified executives can be harder to find, according to Aaron Mitra of Phillips, DiPisa & Associates, which works with Bristol Hospital's board on recruiting.

"Not just anybody can come in and run one of these organizations, and I think it was a different skill set that we needed 10 years ago," Mitra said.

Bristol Hospital's compensation consultant, Alexander Yaffee, CEO of Yaffe & Co., said hospitals aren't like other not-for-profits, such as colleges.

"The complexity is nowhere near the same when you're dealing with life and death and you're dealing with the lifeblood of a community," Yaffee said.

For Barwis, the budget target (specifically, the health system's bottom line) is the biggest factor in his compensation. If he misses the financial target, even if he shoots the moon on every other goal, it's entirely up to the board whether or not to grant him any bonus.

Sometimes, Blum said, a missed year isn't Barwis' fault.

In fact, the hospital tax has arguably cost Barwis money.

Bristol Hospital lost a net $2.4 million to the hospital tax in 2016, according to state data, which would have been more than enough to cover the health system's $1.5 million operating loss that year.

Barwis missed his 2016 financial target, and took a pay cut of nearly $250,000 the following year. He missed again in 2017. His 2018 compensation has not yet been made public, but he said he hit the 2018 budget goal, with the system booking a nearly $2 million surplus.

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