Bigger bonuses, higher executive salaries and a few eye-popping retirement payouts. That’s how St. Luke’s Health System closed the books on its final year as a nonprofit independent hospital chain, according to recent tax filings.

The $2.5 billion hospital system, which merged with St. Louis-based nonprofit BJC Healthcare at the start of 2024, paid one-third more in bonuses and incentives to its top-earning employees in 2023 compared to the previous year. Combined total compensation for those employees, whose salaries are included in the hospital system’s 990 tax filings, was up 27%.

Not surprisingly, executives at the top of the organizational chart saw the biggest paydays.

• Dr. Melinda Estes, who retired as CEO when the merger was completed, had total compensation of $4.4 million, including a $2 million base salary, a $1.57 million bonus (46% bigger than the previous year’s) and a $752,000 payout from a supplemental executive retirement plan (SERP).

• Chief Financial Officer Chuck V. Robb, who now is chief financial officer at BJC, pulled in total compensation of $7.8 million, thanks in large part to a $5.66 million retirement plan payout. (Robb had worked for St. Luke’s for three decades.) Meanwhile, his 2023 bonus of $1.17 million, more than three times his 2022 bonus, was more than his $747,000 base salary.

• And Julie Quirin, who became St. Luke’s president at the end of 2023 and is now president of BJC’s western region, got total compensation of just under $1.9 million in 2023, including $960,000 base pay and a $521,000 bonus (24% more than the previous year).

St. Luke’s did not respond to requests for comment.

While noteworthy, the health system’s compensation packages are consistent with the broader nonprofit health care ecosystem. For decades, the trend has been to pay top hospital executives higher salaries as hospitals and health systems consolidate.

A wave of big payouts

In that context, executive salaries paid during St. Luke’s last year as a standalone system are unsurprising. When compared with executives at other nonprofit systems, they aren’t even exceptional. 

In 2021, nonprofit hospital systems Sentara Healthcare, CommonSpirit Health and Nuvance Health each paid their CEOs more than $30 million in total compensation, according to the Lown Institute, a nonpartisan health care think tank.

Across the board, executive salaries at nonprofit hospitals are rising, surpassing what average hospital workers make caring for patients by ever-growing margins.

In a study released last year, economists at Rice University found that CEO pay at independent hospitals and health systems jumped 30% between 2012 and 2019, from an average of around $996,000 in 2019 dollars to $1.3 million. Registered nurses, by contrast, had mean wage growth of 2.3% over the same period, from $75,652 in 2019 dollars to $77,460.

Dr. Vikas Saini, Lown Institute president, said surging executive pay packages at nonprofit hospitals have been a long time coming. When Medicare was created in the 1960s, more people were insured, so hospitals gained a new source of revenue. 

Saini argued in an article published in Health Affairs that more revenue led to shifting attitudes in health care. Hospitals drifted from community-focused nonprofits toward behaving like big businesses. They added more corporate leaders to their boards, who made financial gains a newly important part of their mission.

“We pretend that hospitals are like other businesses,” he said. “It’s true, we don’t want them losing money. We do want them to be solvent. But there’s a difference between being solvent and serving the community and going all out like a business to maximize your revenue.”

And along with the shift in attitudes about hospitals’ missions came highly paid executives.

Derek Jenkins, a health economist at Rice University, said he and his colleagues are studying whether the growing salaries are associated with better hospital quality. The answer is unclear. But another correlation is hard to dispute.

“It’s definitely fair to say that higher profit (at the hospital) is associated with higher compensation,” he said. 

Surging compensation and consolidation go hand in hand

That’s why most experts agree the trend toward higher executive pay goes hand-in-hand with a wave of hospital mergers that has led to far fewer stand-alone, community hospitals and the emergence of larger systems.

In 2022, seven out of 10 hospitals were parts of larger systems, compared to just over half of hospitals in 2010. Last year, health systems announced 72 mergers, the most since 2020 when 79 were announced. St. Luke’s merger with BJC was one of 65 planned in 2023.

Hospitals argue that they need to merge to compete. They point to market forces like an insurance industry that controls prices and argue they will be stronger if they are bigger.

When St. Luke’s and BJC announced they had reached a definitive agreement to merge in late 2023, the hospitals said becoming Missouri’s largest hospital system would help them recruit top talent, bolster medical research and help them address health care disparities.

In reality, some economists say, the cost of care goes up when mergers reduce hospital competition. Even mergers between hospitals that don’t compete in the same market can lead to higher prices for patients, some studies have found.

But while there is no consensus about how hospital consolidation helps or hurts hospitals and patients, there is wide agreement about what it does to executive pay.

In fact, Lawton Robert Burns, a professor of health care management at the University of Pennsylvania’s Wharton School, argues that higher CEO compensation that results from mergers is the primary driver of consolidation.

“You get bigger systems and bigger systems have bigger pay,” he said. “It has nothing to do with quality or access or other things they say. … It’s all designed to enrich themselves.”

Inside ‘top-hat plans’

Nonprofit hospitals argue they need to pay more to attract top executive talent. They can’t provide stock options like their publicly traded counterparts, but they can pay large incentive bonuses, offer housing perks and set up and fund deferred retirement plans for top executives. 

SERPs, also known as “top-hat” plans, allow select employees to defer income before paying taxes. According to the Lown Institute, hospitals often fund them through cash value life insurance purchased by the hospital or company providing the plan.

Similar to a 401(k) retirement plan, which is typically available to every employee in an organization, income is invested in SERPs before taxes are paid. Taxes are only due once money is withdrawn.

But unlike 401(k)s and other retirement plans known as qualified plans, top-hat plans don’t limit participants’ annual contributions. That means the eventual payout has the potential to be much bigger.

In a study of top-hat plans in private industry, the Institute for Policy Studies found marked income disparities, even between top-earning CEOs who have access to SERPs and those who don’t.

The study crunched the numbers for two theoretical CEOs who each invested $1 million a year over seven years. Researchers found that the CEO with a top-hat plan, who didn’t have to pay taxes up front, could potentially earn $6.6 million from the investment. But the executive who had to pay income taxes before investing the money would come out with $5.3 million.

Of course, a regular employee with access to a 401(k) or other tax-deferred retirement plan has far less income potential. Even if an employee has enough of their paycheck left over to invest the maximum allowed, that maximum contribution by law was only $23,000 in 2024. (Workers who are at least 50 years old can make additional catch-up contributions.)

Sarah Anderson, an author of the Institute for Policy Studies’ report on top-hat plans, said the disparity in retirement benefits is another example of the vast wealth gap between executives at the tops of organizations and the employees who work there. And that gap also applies to nonprofit hospitals.

Until relatively recently, many employers maintained pension plans to fund employees’ retirements. Employers made the financial investment, and employees were guaranteed payments once they retired. St. Luke’s discontinued its pension plan at the end of 2021, according to an independent audit report.

But as labor unions lost power, Anderson said, pension plans were replaced by defined benefit plans like 401(k)s “where burden and risk is on individual employees,” she said.

Meanwhile, top executives who qualify for top-hat plans have comparatively enormous retirement accounts.

“You know, there’s a number beyond which it’s not about food on the table or making sure your kids can afford to go to college, or even that you have a vacation home,” Saini said. “There’s a number beyond which you have all that, and at that point, what is the point?”