Des Moines Register May 26, 2005

$2 million a year salaries for 2 Waterloo doctors under fire

Covenant defends the payments to doctors, saying they worked very long hours.

Waterloo, Ia. - A Waterloo hospital is drawing criticism for paying two of its doctors annual salaries of more than $2 million while enjoying tax-exempt status as a charitable organization.

Covenant Medical Center paid orthopedic surgeon Gary Knudson more than $2.1 million in the budget year ending in June 2003, according to documents the hospital filed with the federal government. It paid gastroenterologist Victor Lawrinenko nearly $2.1 million that year, and it paid orthopedic surgeon Richard Naylor more than $1 million, according to the documents, which are the latest on file.

Covenant President Jack Dusenbery said the doctors worked very long hours and handled heavy caseloads while the hospital struggled to recruit additional specialists to help shoulder the workload. "I thank them for their efforts holding the fort down," Dusenbery said.

But the leader of an independent Waterloo medical practice said the $2 million salaries are several times as large as the average national pay for the doctors' specialties. "People are just shocked at this amount," said Gil Irey, chief executive officer of Cedar Valley Medical Specialists, which includes 55 physicians. Irey recently learned of the pay levels by looking at public documents Covenant must file to maintain its tax-exempt status. He said it's unfair that his business, which pays taxes, must compete against a purportedly nonprofit hospital that can afford to pay that much to its staff physicians.

For context, Irey pointed to salaries at University Hospitals in Iowa City, which is the state's biggest and best-known hospital. Its highest-paid physician in 2003 made $417,000, the state reported. The internationally acclaimed Mayo Clinic in Rochester, Minn., paid its top doctor $624,000 that year.

The Covenant physicians declined to comment. Dusenbery said the doctors' pay was based on a formula that takes the amount of business they brought to the institution and subtracts expenses. "It's really not rocket science," he said.

Dusenbery said only a few of his hospital's doctors had unusually large salaries. He said that for a time, Knudson handled a huge portion of the hospital's orthopedic surgeries, including emergency operations performed at night or on weekends. "We are blessed with a physician willing to sacrifice his family life and work that hard," he said. Covenant managed to attract Naylor in 2002, and the hospital expects to add a third orthopedic surgeon this summer.

New report Covenant is scheduled to file a financial report this month for the budget year that ended last June. That report will show that Lawrinenko was paid $1.8 million, and that Knudson and Naylor were paid $1.6 million each, hospital officials said. To support the contention that the doctors worked harder than most, Covenant released internal accountings of the three men's workloads. Irey, Dusenbery's competitor, reviewed the figures and was unswayed. He said they were in line with, and in some cases less than, the amount of work his group's top physicians perform, including cases handled at Covenant. Yet, he said, the pay given to the top Covenant physicians was at least triple what his top doctors made for the same kinds of services. Like all Iowa hospitals, Covenant is classified as a nonprofit organization, which exempts it from paying taxes on its income, property or sales. Industry leaders defend the exemptions, saying they more than make up the tax difference by providing large amounts of free care to needy people.

However, in the same year that it was paying doctors more than $2 million apiece, Covenant reported that it provided less than $2 million worth of charity care. That was about 1 percent of its patient revenue, which is about a third of the state average, according to the Iowa Hospital Association.
Covenant leaders said their charity care rose to nearly $2.9 million for the fiscal year ending last June.

Dusenbery defended the service of his hospital, which is affiliated with the Roman Catholic Church. "We challenge ourselves to give free care, to help the community, to worry about the poor," he said.

A central Iowa medical leader said word of the Covenant salaries could give Iowa's health care system a black eye.

Ed Brown, chief executive officer of the Iowa Clinic, said the news could threaten the credibility of contentions that Iowa hospitals and doctors need more public money to maintain quality care. Brown said he was particularly troubled to hear that a nonprofit hospital would pay an individual doctor more than the total it spent on charity care. "That's an atrocity," he said. Brown, whose clinic includes more than 110 physicians, said the top earners generally would include orthopedic surgeons. He said an extremely busy, experienced surgeon might hope to make up to $1.2 million per year in the Des Moines area. "Nobody is making $2 million," he said. "Nobody."

Federal oversight
A spokeswoman for a national watchdog group said federal law bars nonprofit organizations from paying excessive salaries. Such organizations must justify their pay rates if regulators ask questions, said Suzanne Coffman, spokeswoman for GuideStar, which tracks spending of charities. Few have had their tax exemptions revoked for excessive salaries, she said, although some have been fined and ordered to repay the money.

The Internal Revenue Service said last year that it was making the question of excessive salaries a top priority in its regulation of nonprofit organizations. Also, a prominent Mississippi lawyer who previously took on the tobacco industry has now set his sights on the hospital industry. Richard Scruggs' firm has filed dozens of lawsuits against nonprofit hospitals, alleging that they fail to provide enough community benefit to justify their tax exemptions. Dusenbery said he is unconcerned about the IRS stance or about the lawsuits. He said Covenant is rechecking the salaries it has paid to top doctors, but he's confident he could defend the numbers. These gentlemen earned this money," he said.

Sample salaries
Here is a sample of the salaries of physicians and top executives employed by Iowa area hospitals, plus the amount of charity care the hospitals provide as a percentage of their patient revenue. (The list is based on the latest figures available through federal or state governments. Part of the reason physician salaries vary is that some hospitals depend on independent physicians for the highest-paid specialties. Those salaries don't show up on the hospitals' reports, because the physicians aren't hospital employees. The charity care figures are based on full charges for services, which tend to be significantly higher than actual costs.)

Allen Memorial Hospital , Waterloo. Budget year ending June 30, 2004.
Highest-paid physician, Dr. Rajendra Singh, emergency room, $359,231.
CEO Richard Seidler, $319,288. Charity care, $3.4 million, 2.7 percent of patient revenue.

Central Iowa Hospital Corp ., Des Moines. (Iowa Methodist Medical Center, Blank Children's Hospital, Iowa Lutheran Hospital.) Budget year ending June 30, 2004. Highest-paid physician: Dr. Janie Hendricks, internal medicine, $352,193. CEO Eric Crowell, $488,900. Charity care, $9.7 million, 2.1 percent of patient revenue.

Covenant Medical Center , Waterloo. Budget year ending June 30, 2003.
Highest-paid physician, Dr. Gary Knudson, orthopedic surgery, $2.1 million. CEO David Ferrell, $325,243. Charity care, $2 million, 1 percent of patient revenue.

Mayo Clinic , Rochester, Minn. Budget year ending June 30, 2004. Highest-paid physician, Dr. Hartzell Schaff, cardiovascular surgery, $525,977. Chairman Hugh Smith, $525,940. Charity care, $22.6 million, 1.5 percent of patient revenue.

Mercy Medical Center , Des Moines. Budget year ending June 30, 2004. Highest-paid physician, Dr. Philip Colletier, radiation oncology, $657,188. CEO David Vellinga, $496,673. Charity care, $5.5 million, 1.3 percent of patient revenue.

University Hospitals , Iowa City. Budget year ending June 30, 2004. Highest-paid physician, Dr. Matthew Howard, neurosurgery, $488,829.
CEO Donna Katen-Bahensky, $367,500.

Charity care figures unavailable. Information on other hospitals: The national watchdog group GuideStar
distributes federal forms on most tax-exempt organizations. The group's
Web site, www.guidestar.org http://www.guidestar.org requires users
to register, but the registration is free, as are copies of the "990"
forms that charitable groups file annually with the Internal Revenue
Service.