The chief executive of the nonprofit Children's Hospital has been paid more than $950,000 in each of the past two years, more than three times the national average for hospital presidents and higher than leaders of much larger nonprofit medical institutions in the Washington region.
Edwin K. "Ned" Zechman Jr.'s total compensation rose from $690,000 in 1999 to $950,000 in 2001 and $970,000 in 2002, according to the hospital's most recent filing with the Internal Revenue Service and interviews with Children's officials. The packages include salary, bonuses, deferred compensation and benefits.
In 2000 his compensation totaled $3.05 million, including a $2.46 million prepaid pension lump sum designed by the hospital's board of directors to keep him at Children's until retirement.
Zechman declined to comment for this article, but board members and major donors say he deserves the compensation he receives, for his work stabilizing the hospital's finances, winning a recent rate dispute with CareFirst BlueCross BlueShield, collecting large sums from local and federal agencies, and aggressively pursuing millions in charitable contributions each year.
In 2001, a year when most District hospitals were losing money, Children's had a 6.37 percent operating margin, the largest of any hospital in the District, according to the District of Columbia Hospital Association.
A compensation consultant hired by the Children's board said Zechman is actually underpaid compared with executives at for-profit companies and some teaching hospitals.
"It is a large, complex organization," said Diana L. Goldberg, board chairman at Children's Hospital. "There are a lot of moving parts. . . . Ned Zechman brought a whole team together that works beautifully and brought this hospital to a secure financial situation. That is where we want to be to serve this community."
She added: "There are few people out in the country who have these skills, and apparently fewer and fewer who are willing to take on this kind of role -- this is what I've heard about the marketplace. It's such a complex role, and so difficult in this day and age of managed care."
The nearest independent pediatric hospital, Children's Hospital of Philadelphia, paid its president, Steven M. Altschuler, $1.1 million in 2001, according to IRS documents.
But Zechman's earnings are comparable to those of the chiefs of area nonprofit hospital organizations that dwarf his organization, and are well above the national average of $289,453 for health care chief executives as reported by Modern Healthcare magazine in 2002.
Ronald R. Peterson, president of the three-hospital Johns Hopkins Hospital and Health System, received total compensation of $928,000 in 2001, according to the most recent IRS filings. He oversees a system with 22,500 employees that collected $2.8 billion in patient revenue last year.
John P. McDaniel, chief executive of MedStar Health, which owns seven teaching hospitals, including three in the District, earned $953,000 in 2000 and $751,000 the next year. MedStar has 22,000 employees and collected $1.98 billion in revenue last year.
J. Knox Singleton, president of Inova Health System, which operates four teaching hospitals in northern Virginia and has 13,000 workers, got total compensation of $922,000 in 2000 and $851,000 the next year. The company had revenue of $728 million that year.
The Children's system consists of a 188-bed teaching hospital in the District, seven suburban outpatients centers and nearly 3,000 employees, including 300 full-time doctors and 176 medical residents. It reported revenue of $266 million in 1999.
The chairman of the D.C. Hospital Association said Zechman's 2002 pay of $970,000 is enviable.
"Wow, life is good," said Daniel P. McLean, chief executive of George Washington University Hospital, a teaching hospital run by for-profit Universal Health Systems. "It's definitely more than I make in three years."
Strength in Fundraising
The financial stability at Children's comes partly from its fundraising. The hospital raises about $12 million in donations each year, including the proceeds of an annual giving campaign conducted by The Washington Post that has generated about $13 million for Children's over 21 years.
In addition, Children's has been adept at currying political favor with presidents and first ladies, winning financial support from Congress and preserving a strong flow of Medicaid dollars from the District government.
Zechman was hired in 1994, when the hospital's finances were shaky, and his admirers say he ushered in an era of stability.
Joseph E. Robert Jr., chairman of a McLean-based commercial real estate, mortgage investment and asset management firm, and his wife, actress Jill Sorensen, emphasized their confidence in Zechman by making a $25 million long-term pledge to the hospital in 2001.
Goldberg and her husband, Stephen, who made a fortune in Washington real estate, matched it. The hospital has named a clinical center for them.
"When the board makes a decision on executive compensation, I have great faith that they are looking out for the best interests of the patients and families -- but keeping in mind that we do live in a competitive world," Robert said. "In order to attract top talent like Ned and many of the physicians who are there, there's a cost."
Zechman and the board also reward the Children's executive staff. In 1999 and 2000, six senior executives collected more than $400,000 in total compensation.
An Unconventional Package
Zechman's 2000 package was unusual, specialists say, because it included a prepaid $2.46 million retirement payout that Zechman, 55, is obliged to repay if he leaves Children's before 2010. The sooner his departure, the more money he would be required to repay, said Children's Chief Financial Officer Gary Manion.
Whayne S. Quin, who preceded Goldberg as board chairman and presided over Zechman's contract approval, said the board wanted to keep Zechman happy.
"We were talking about making sure that he felt good," said Quin, a development lawyer. "We also got an outside opinion from consultants to make sure we were doing the right thing. We never took any action with regard to any senior executives without getting outside advice from a consultant who looked at compensation throughout the U.S. and made sure we were right in the middle of it. We are still below the top salaries."
That consultant, William E. Quirk, said Zechman's pay is higher than that of 65 percent of hospital executives from teaching hospitals and children's hospitals.
But he added: "Ned could easily be pirated away by a big teaching hospital at a package of 2 or 21/2 times what he has at Children's because he has the same skills. Everything that's been done for Ned Zechman is comparable for like CEOs in the nation."
Quirk said Zechman's retirement package is unconventional.
"If he leaves prior to the retirement date, he must pay back a declining amount," Quirk said. "It's somewhat unusual, but it does occur. Most organizations do it in chunks, in reverse. They say, 'We'll give you a $5 million retirement fund, but you stay 12 years, and every three years you're entitled to a portion of that.' The board decided that this was a better way of ensuring his continuity because opportunities were opening up in Boston and Philadelphia."
Taking on CareFirst
Zechman made headlines last fall when Children's took on the region's largest health insurer, CareFirst BlueCross BlueShield, in a rare public rate dispute between two large tax-exempt organizations. Each characterized the other as greedy and wasteful.
During the three-month public standoff, CareFirst accused the hospital of spending lavishly on its operations. CareFirst Vice President M. Bruce Edwards said Children's was collecting more revenue per inpatient than any other hospital in the Washington metropolitan area.
Jack Keane, a veteran health economist hired by CareFirst, argued that Children's was typical of pediatric hospitals nationwide. "Children's hospitals have less incentive and inclination to manage their costs," he said.
"They get the revenues they want by making public appeals and using that as leverage. . . . Those emotional ties they play on are tools they use in rate disputes."
But Zechman said that CareFirst President William L. Jews told him he could not grant the rate increase because it would disrupt CareFirst's plans to sell the company to a for-profit firm in California. Children's officials pointed out that Jews's annual pay package was three times as large as Zechman's.
CareFirst officials denied that their stance had anything to do with the proposed sale and insisted that Jews's compensation was reasonable.
Ultimately the insurer acknowledged that Johns Hopkins Hospital's pediatric services are more expensive than Children's, and CareFirst compromised on the Children's rate increase.
Sam Jordan, a District health care advocate, said Zechman's tactics in the CareFirst dispute were heavy-handed and insensitive. Zechman withdrew Children's as a network provider rather than accept rates he deemed insufficient. Jordan said thousands of families that depend on Children's specialists to care for their ailing children were told to switch health plans.
"For many families, Children's and Zechman knew that this was an impossibility," he said. "I got calls from parents who were crying on the telephone."
But Carrin Brandt, a CareFirst customer who led a parents campaign in support of Children's during the dispute, said she was comfortable with Zechman's business practices and his pay.
"Children's does so much good for the community," she said. s
"Maybe they are slower and less efficient, but that's what makes them who they are. . . . They spend time with kids and families, explaining options to make the treatment the best, not just medically, but socially and emotionally. . . . The other hospitals in the area that care for children just rush you through."