A precedent-setting tax court case involving Morristown Medical Center highlighted the eyebrow-raising pay scale of nonprofit hospital CEOs.
TRENTON -- Ask hospital leaders whether New Jersey's nonprofit hospital CEOs earn too much money, and they will confidently say no. Their compensation packages are based on what other CEOs are making in a highly competitive market.
But a tax court judge last summer sharply disagreed with that assessment, describing this method of comparison as a "wholly self-serving" justification.
State Tax Court Judge Vito Bianco ruled Morristown Medical Center should lose its tax-exempt status -- in part because of its parent company CEO's $5 million-a-year pay package.
Today's non-profit hospitals generate "significant revenue and pay their professionals salaries that are competitive even by for-profit standards," according to Bianco's decision.
Months later, a settlement was reached that allowed Morristown to remain a nonprofit entity, while paying out $15.5 million over the next decade to help offset property taxes. And Morristown's CEO Joe Trunfio, who earned an enviable $5 million in compensation, has retired.
In 2014, his last full year as the head of Atlantic Health System, Trunfio earned $4.7 million in salary and bonuses, according to the most recent IRS tax filings.
The tax court ruling has spawned 35 other tax appeals from municipalities ready to prove the non-profit hospital in town operates more like a for-profit company as Bianco said Morristown Medical Center had.
But experts in the hospital business doubt Bianco's ruling will have a chilling effect on CEO compensation. The 10 highest-paid nonprofit hospital CEOs in New Jersey earned from $2 million to $4.7 million in 2014, according to IRS records.
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J.B. Silvers, a nationally recognized expert on hospital CEO compensation and professor at Case Western Reserve's business school, said as high as some compensation packages appear, there are mechanisms to keep them in check.
"What holds it down is the IRS. In order to maintain not-for-profit status, you cannot pay excessive compensation," Silvers said. "They can literally lift the not-for-profit status. It has happened."
Hospital trustees will protect themselves by hiring an executive compensation firm to bring them "comparables" -- examples of how much other hospital CEOs in similarly sized hospitals or hospital chains are making, Silvers said.
A handful of large hospital systems with the highest paid CEOs confirmed to NJ Advance Media their boards of trustees go about it the same way -- by reviewing comparable salary information collected by outside consultants.
The bottom line figure includes much more than the base salary. The $2.5 million in compensation for CEO William McDonald of St. Joseph's Regional Medical Center in Paterson, for instance, "reflects a salary of $861,223 plus a one-time retirement savings payment," according to a hospital spokeswoman.
Count on CEO pay to remain competitive, especially in the Obamacare era, Silvers said. The landmark health care law expects hospitals and their orbit of outpatient services professionals to prevent illness and re-admissions. Hospitals will eventually be paid moreso for how well they manage health than just treat disease.
"Getting someone in there to deal with the cost and quality side is a difficult thing to do," Silver said.
The 10 highest-paid nonprofit hospital CEOS in New Jersey in 2014:
1. Joseph Trunfio, Atlantic Health: $4.7 million
2. John K. Lloyd, Meridian Health: $3.5 million
3. Robert Garrett, Hackensack University Medical Center: $3.3 million
4. William McDonald, St. Joseph Health System: $2.5 million
5. David Tilton, AtlantiCare: $2.47 million
6. Barry Ostrowsky, Barnabas Health: $2.27 million
7. Audrey Meyers, Valley Hospital: $2.2 million
8. Michael Maron, Holy Name Medical Center, $2.2 million
9. Chester Kaletkowski, Inspira Health Network: $2 million
10. Richard Miller, Virtua Health: $1.94 million.
Susan K. Livio may be reached at slivio@njadvancemedia.com. Follow her on Twitter @SusanKLivio. Find NJ.com Politics on Facebook.