Forbes | Dan Munro
A few weeks ago someone posted the annual compensation of a single healthcare CEO in a social media forum. I forget which CEO and which forum, but I’ve seen this before and it is provocative.
Whenever I see this I always wind up wondering how executive compensation
across various healthcare sectors compares. For example, how does executive
compensation in the pharmaceutical sector compare to executive compensation in
the hospital sector or the healthcare IT sector?
I searched for awhile, but always came up short, so I decided to compile my
own version for 6 different healthcare sectors. The first big takeaway (and no
real surprise as the headline suggests) is the rank order of the sectors. The
highest is pharmaceutical, followed by for-profit hospital systems, insurance
payers, healthcare IT, medical devices and then finally nonprofit hospital
systems. There are a few disclaimers, of course, and I’ve added those at the
end of the six charts.
This isn’t meant to be scientific, but it does represent an interesting
snapshot of executive compensation by healthcare sector for the top five
executives at 25 publicly traded and five nonprofit companies. Using publicly
available information, the total list is 150 executives at 30 companies in six
sectors. As a way to compare companies both within and to other sectors, the
primary sort column was total executive compensation (E-Comp Total).
There is no mistaking the fact that the sector with the highest market
capitalization ‒ pharmaceutical companies ‒ also had the highest executive
compensation. This sector also had the highest net profit margins (NPMs) of any
healthcare sector and it could well be the highest NPMs for any industry
including those outside of healthcare. Apple AAPL -0.2%
(for example) has an NPM of 21.61%.
The second-highest sector was for-profit hospital systems. What’s interesting to note here is the relative size of the five companies by market capitalization compared to those in the pharmaceutical sector ‒ a comparatively small $60 billion to well over $1 trillion.
Not far behind and ranked third overall were the insurance payers.
Ranked fourth was healthcare IT ‒ but there’s a sizable caveat here in that
one of the biggest companies in this sector (EHR vendor Epic Systems)
remains privately held, so public data on executive compensation is not
available.
Surprisingly, medical devices came in next to last as the fifth-highest
sector for executive compensation, but the margin was relatively narrow ($147
million to $121 million). It’s easy to imagine a different set of five
companies swinging this one much higher in the ranking order, but I tried to
select those that were exclusive to medical devices.
Not surprisingly, the nonprofit hospital systems ranked last in terms of
executive compensation. One important distinction here is that the numbers were
sourced through IRS Form 990s and most were from 2013 filings (so are likely to
represent 2012 compensation).
So what was
the total across these six sectors?
About 150 healthcare executives ‒ across 30 different companies (most
publicly traded) ‒ took home about $960 million in annual compensation. If we
had included all the executives at all 30 companies, it’s likely that the total
would easily have eclipsed $1 billion.
Executive compensation is a big issue in every industry ‒ and that includes
healthcare. By every measure we can visibly see the pharmaceutical industry
continues to reign supreme in terms of major market indices ‒ now including
even a rough approximation of executive compensation.
This was also highlighted recently in the Milliman
Medical Index, which graphically
illustrated the effect of drug pricing on annual consumer healthcare costs.
We need an intelligent debate on the cost of healthcare. Our national
healthcare expenditure (NHE) for this year is likely to surpass $3.2 trillion.
When divided by the current population (319 million) we are effectively
spending more than $10,000 per year on every American ‒ just for healthcare.
The Affordable Care Act made a significant dent in the number of uninsured,
but that was a debate around coverage, not cost. The debate we’ve managed to
avoid ‒ and the one we should all anticipate ahead, especially heading into a
presidential election cycle ‒ is the one around cost. Saying that healthcare
costs are “unsustainable” is a popular characterization, but it solves nothing.
At the very close of 2011 I wrote a
healthcare list here on Forbes that
showcased some of the appalling metrics that were evident then and that we
continue to live with to this day. Sadly, not much has changed on that list ‒
except #12 (number of uninsured). Many of the statistics have remained the same
‒ or simply gotten worse. Executive compensation needs to be a part of the cost
debate at a time when increasing drug prices are clearly and directly affecting
the cost of healthcare for every American. It won’t be easy ‒ or popular
‒ but it’s gone well past unsustainable to unavoidable.
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