Empire exec paid $690,000

The management team credited with rescuing Empire Health Services from insolvency and putting its troubled hospitals into a position for possible sale earned $1 million for the effort in 2005.

That is an amount equal to nearly half the company’s $2.4 million profits that year.

Newly released tax documents show that Jeff A. Nelson, 51, the chief executive of the system that includes Deaconess Medical Center and Valley Hospital and Medical Center, earned $690,000 in 2005.

Empire board members and industry experts say such compensation for a hospital turnaround specialist is fair. The board is satisfied with Nelson’s work and has rewarded him with a contract through 2008, said secretary Judy Cole.

Yet Nelson’s pay exceeds that of some top hospital executives overseeing much larger, more profitable hospitals. Nelson earned about $250,000 more in 2005 than the $441,000 paid to Ryland “Skip” Davis, who as CEO of Providence Health Services oversees Sacred Heart Medical Center, Holy Family Hospital and several smaller hospitals in Eastern Washington.

Empire board members dismiss the pay disparity, saying Nelson’s workload negates the need for a high-paid president or chief operating officer.

The tax records show that Empire also paid accounting specialist Irwin L. Hurn about $311,000 that year. Hurn, now vice president of business development, was hired by Nelson as an interim chief financial officer.

Empire Health officials released the public financial documents last week at the request of The Spokesman-Review, after the company announced plans to seek investors or possible buyers for Deaconess and Valley hospitals.

Empire managers also distributed the salary figures to the system’s 2,400 employees this week after officials learned of the newspaper’s plans to publish the rates of pay.

Nelson canceled an interview last week and didn’t return phone calls.

Finding nonprofit hospital leaders with salaries exceeding Nelson’s requires looking to large hospitals in Western Washington, including Virginia Mason Medical Center, the Seattle research institution that paid CEO Dr. Gary Kaplan a 2005 base salary of $861,000.

Nelson’s compensation shouldn’t surprise anyone, past Empire Health board President Mike Taylor said Thursday.

Board members faced with a $36 million deficit in 2004 had to take drastic action to save Empire from financial collapse. They turned to Tatum LLC, a consulting firm that specializes in providing outside executive teams to revive failing organizations.”They are specialists,” Taylor explained. “Turnaround specialists don’t get paid like ordinary folks. There’s no such thing as a going rate for a turnaround specialist. (Nelson’s salary) was not remotely close to the maximum.” Indeed, in the world of hospital administration, that’s simply the price of salvage, one industry analyst said.

“It’s usual for these types of firms because their prices are extreme,” said Joshua Nemzoff, chief executive of Nemzoff and Co., a Pennsylvania-based company that has brokered more than 150 hospital mergers, acquisitions or sales. “You’re paying three times what it would cost to hire a regular executive.”

Determining executive pay is a structured process that includes applying a board’s philosophy and using reputable statistics to find salary norms, said Bob Johnson, a co-founder of Seattle-based Johnson HR Consulting Inc.

Johnson works with the Sacred Heart board to help set executive salaries and said there’s a shortage of quality talent that has helped drive up pay.

By all measures, Nelson has been no regular executive. Since October 2004, the man whose resume includes health systems, hospitals and technology firms in at least six states has managed the Empire turnaround while never settling down in Spokane.

Most weekends for more than two years, Nelson has flown to his home in Stillwater, Minn. The Tatum Web site lists Nelson as a partner in the Minneapolis practice of the firm.

Nelson spends weekdays in Spokane to carry out the 80- to 90-hour-a-week duties of his contract. Hurn, a partner in Tatum’s San Diego office, commutes regularly.

Taylor said having an out-of-town management team is common in the industry and doesn’t matter to community members or organization employees.

“I don’t think a lot of people pay attention to what Empire Health does,” he said.

Representatives of an Empire employees union declined to comment Friday on executive pay issues.

“This just isn’t something we’re going to get involved in right now,” said Chris Barton, secretary and treasurer of SEIU 1199NW.

Taylor worried that raising questions about the pay and living situations of company executives could jeopardize negotiations being led by Cain Brothers, a Wall Street hospital brokerage firm hired by the board.

“You’re making me uncomfortable. If this is something to stir up controversy, it’s not appreciated,” he told a reporter. “Listen to me carefully: This is a delicate, important process. Be constructive in what you are about.”

In an earlier interview, Nelson and Taylor acknowledged that Cain Brothers’ contract includes incentives for Empire’s . Nelson and Taylor declined to discuss those terms or whether an outright sale of the hospitals would net Cain the most money.

Nelson is nearing the end of what typically has been a three-year tenure in the positions he’s held during the past quarter century. On the Tatum Web site, he takes credit for creating a $40 million Empire turnaround in less than 14 months and returning the health system to operating profits within three months.

Part of the success was implementing recommendations from PriceWaterhouseCoopers LLC, which charged Empire more than $4.5 million in consulting fees, said Cole and Empire spokeswoman Becky Swanson.

Nelson’s business approach uses a combination of experience and training that includes Greenbelt certification from Six Sigma, a national business performance system, and his own proprietary philosophy for improving health care payment incentives that has an application pending with the U.S. Patent and Trademark Office.

Nelson’s background includes a master’s degree in hospital administration from the University of Iowa. He claims to be a certified public accountant who passed the exam in Texas, but there’s no record of that, according to William Treacy, executive director of the Texas Board of Accountancy.

Even a casual review of the firm’s financial status appears to reveal Nelson’s acumen, noted Nemzoff, who examined Empire’s financial records.

By one accounting measure, Empire’s earnings before interest, taxes, depreciation and amortization (EBITDA) was a negative $9 million in December 2004, according to Nemzoff. Applying this same accounting formula, it rebounded to a positive $19.7 million a year later.

“Their EBITDA increased by $30 million plus,” he noted. “The operating performance turned around very, very precipitously.”

Still, it’s obvious that Empire has been in trouble for years and that a sale is the likely solution, Nemzoff said.

“It looks like they’re losing a lot of money on Valley Hospital,” he said. “And they are losing their shirts on the specialty clinics.”

Nelson and his team saved a dying system, Nemzoff said. Ultimately, however, that’s probably not enough to keep Empire under local control.

“I think the board is making the right decision,” the industry analyst said. “They should have sold this place five years ago. They’ve been cutting off the cat’s tail an inch at a time here.”