Thursday, July 16, 2009

How Many Administrators Does It Take?

July 16, 2009, 8:45 a.m.

Administrators Are Multiplying & Sucking Us Dry
(brought to you by*)

July 21 Addendum. This blog entry deals with three aspects of institutional administrators: (1) the number of administrators (do we really need that many?) and their rate of increase compared to the number of those actually doing the work of the institution, (2) their pay (do we really need to pay that much? are they worth that much?), and (3) the relative lack of transparency, and the public/media's inability to compare compensation packages because of all the hidden, and added on, payments.

This morning's news provides one more example of the last category. Andy Hamilton, "Ferentz's contract finalized," Iowa City Press-Citizen, July 21, 2009.

It begins, "Kirk Ferentz agreed in February to a contract extension that would keep him in place as Iowa's football coach through the 2015 season. More than five months later, the ink on the signatures is finally dry." That's a cute line, but without more one really is left wondering, "why the delay between a February agreement and a July release of the information?"

On the one hand, Iowa's Athletic Director, Gary Barta, says of the contract, "we haven't given him a raise the past three years and there isn't one in the new agreement . . .." On the other hand, he acknowledges the University "will continue to pay the . . . coach $3.02 million annually plus incentives" -- without identifying what those "incentives" might be or how much additional income they might generate. He continues, "Under the new pact [he] will have access to a private plane for personal use of 35 hours each year -- a perk that could be worth $85,000 annually."

First off, I suspect most Iowans would consider an additional $85,000 annual income from a grateful employer in the nature of "raise." Even for the $3 million-dollar man it's roughly a 3% increase in pay. And, given that this "perk" is worth roughly twice the average Iowa family's income, I suspect many Iowans may view his flying about at nearly $2500 an hour pretty high living, even for Iowa's highest paid public servant.

I don't mean to pick on Coach Ferentz, who is a good coach and for all I know an all-round wonderful fellow. But it did seem to me worth noting this morning's story in the context of this prior blog entry about those who receive institutions' top pay.


What do health care, Goldman Sachs and the Cedar Rapids school superintendent have in common?

Each was recently featured in the news in ways that ought to cause us to take a second look at how we're going about running our major institutions.

One of the consequences of choosing for-profit companies to deliver health care is that we're now trying to do the impossible -- and paying the price to do it. We've deliberately gone about creating a system with a systemic problem, an unresolvable internal conflict of interest. And from the early rumblings emanating from the hollow halls and minds of the best Congress money can buy it looks like we're going to continue doing so.

What do I mean? I mean that when you hand over health care delivery to those whom Wall Street controls and drives to ever-increasing profits, and who can only increase profits by raising premiums and denying care and claims, you should not be surprised that our costs accelerate far faster than inflation, and that we continue to pay more and get less health care from our system than any other on earth.

In addition to that inherent catastrophe in our system there is the matter of the percentage of overall expenditures going to administrative costs -- estimated to run at something like 10 times the percentage we pay to administer Medicare and Medicaid (our "socialized medicine" systems). Couple that with what the companies pay for marketing and advertising, among other things, and something like one of every three "health care" dollars serves little more than our ideological rigidity.

An op ed column in the Register recently put the matter in stark, graphic terms. Miles Weinberger, "Rethink priorities in UI hospital layoffs," Des Moines Register, July 11, 2009.

Dr. Weinberger is a pediatrician at the University of Iowa Hospital. There must be something about working with kids that creates caring, progressive, rational thought about public policy. I may well be wrong, and I certainly have no data, but at least my general impression over the years has been that some of the best suggestions from within the medical profession have come from pediatricians.

Dr. Weinberger expressed his concern that "two administrative personnel at the University of Iowa Hospital pulled two pediatric nurse practitioners from patient-care responsibilities . . . professionals, with more than 20 years of experience in pediatric respiratory and allergic disease . . .."

Now, we all know that these are difficult times, and the hospital was in a difficult financial bind. But was the bind because these two pediatric nurse practitioners were costing the hospital excessively? Of course, by decreasing hospitalizations . . . hospital income is adversely affected. But do we really want increased hospitalizations that are preventable by improved outpatient care? . . . [T]here is certainly the potential for current administrative decisions to have such unintended consequences.

Costs are exceeding income, and something had to give. So let's look at where personnel costs have been rising.

Personnel costs nationally have not risen primarily because of too many health-care personnel. Rather, there's been a meteoric rise in the number of administrative personnel. From my observations at the University of Iowa Hospital, we have emulated this national pattern . . .."

Is he right? Look at the chart for 1970 to 2008 from the Bureau of Labor Statistics at the National Center for Health Statistics, based on an analysis of the Current Population Survey. The number of doctors is roughly 150% of what it was. The number of administrators? Roughly 3000% of what it was.

These numbers are from the sickness industry, and are not unrelated to its accelerating costs, as just discussed.

But the point, for now, is not the folly and fraud in our chosen system for delivering health care, it is that similar patterns may well exist throughout other American institutions as well.

How many Pentagon administrators does it take to support one of our combat soldiers in Afghanistan?

How many GM administrators did it take (before bankruptcy) to produce a single automobile?

How many educational administrators does it take to run a university faculty and student body -- or school district?

I'm not charging all American institutions are administratively top heavy. I don't have access to data that would support, or refute, such a charge. All I'm saying is that I think it's something that ought to get more attention than it does.

Is it possible, when cuts are necessary in an economic downturn, that the reason the nurse practitioners are let go from hospitals, UAW workers from auto plants, teachers from schools -- rather than an equal proportion of administrators -- is because it is the administrators who are making the decisions? If nurses were vested with the power to make all hiring and firing decisions for a hospital would their best judgments end up being different?

If faculties were given responsibility for all hiring and firing -- and setting of pay scales -- would they allocate the positions and money in the ways that university presidents tend to?

And speaking of pay, the Gazette had an editorial the other day that dealt with the difficulty we confront in trying to find out, and then understand, just how much compensation administrators are getting. Editorial, "What a Superintendent Actually Costs," The Gazette, July 14, 2009, p. A6.

[I]n order for taxpayers to better judge, the [Cedar Rapids school] district must be clearer about what that [superintendent] compensation was for. [B]etter explaining is in order when those extras allow a public employee to earn nearly $100,000 over his annual base salary. . . . It’s relatively easy to compare base salaries — a spreadsheet with those figures is on the Iowa Association of School Boards’ Web site. But total compensation is a different story. [The Cedar Rapids superintendent's]gross taxable income, $273,172.05, . . . includes his base salary of $178,854, plus an additional $9,230.75 in professional expenses, a salary supplement of $1,100 and a retention supplement of $74,577.09. Even when contracts are collected and compared, varying perks like extra annuity payments, performance bonuses, vehicle allowances and others make apples-to-apples comparisons difficult.
Of course, there are some administrators for whom $273,000 is little more than pocket change.

Even on Wall Street, the land of six- and seven-figure incomes, jaws dropped at the news on Tuesday: After all that federal aid, a resurgent Goldman Sachs is on course to dole out bonuses that could rival the record paydays of the heady bull-market years.

Goldman posted the richest quarterly profit in its 140-year history and, to the envy of its rivals, announced that it had earmarked $11.4 billion so far this year to compensate its workers.

At that rate, Goldman employees could, on average, earn roughly $770,000 each this year — or nearly what they did at the height of the boom.
Graham Bowley, "With Big Profit, Goldman Sees Big Payday Ahead," New York Times, July 15, 2009, p. A1.

Of course, "averages" are misleading. As the old line has it, with your hand in a pot of boiling water, and your foot in a bucket of ice water, on average you're comfortable.

Three years ago the Goldman Sachs CEO earned almost 8 times that employee annual average -- every month! "In 2007, he made $68.7 million and bought a $27 million apartment at 15 Central Park West." "Lloyd C. Blankfein," Times Topics/People/New York Times.

Of course, there's much more to be concerned about than the mere injustice of excessive administrative compensation. As Bowley's article continues, "Another concern is that the blowout profits might encourage rivals to try to match Goldman in the markets so they, too, can return to paying hefty bonuses. Wall Street’s bonus culture is widely seen as having encouraged the excessive risk-taking that set off the financial crisis. 'I find this disconcerting,' said Lucian A. Bebchuk, a Harvard law professor. 'My main concern is that it seems to be a return to some of the flawed short-term compensation structures that played an important role in the run-up to the financial crisis.'"

In case you've forgotten, these are the guys whose greed brought down the global economy and caused individuals to lose investments worth trillions of dollars. These are the guys who then had the gall to call upon their buddies in the Administration, and the members of Congress they own, to fork over trillions of taxpayer dollars.

As Bowley quotes Senator Brown, “People all over this country feel an incredible frustration that they are seeing their neighbors lose their jobs and the government is helping companies like A.I.G. and Goldman Sachs and then the next thing they are reporting huge profits and huge compensation,” said Senator Sherrod Brown, Democrat of Ohio and a member of the banking committee. “I think people are incredulous that this system is working this way.”

Bottom line: There's a lot wrong with the way we administer our largest institutions. Turning to administrators to study the problem, fire administrators, and cut the pay of those who remain -- including themselves -- makes about as much sense as expecting a for-profit sickness industry will ever be able to deliver meaningful health care to every American at a reasonable cost.

Whether it's the rapidly increasing numbers in our institutional administrative armies, their rapidly increasing pay, or the rapidly decreasing wisdom of their decisions, it's a challenge we seem ill equipped to address.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson

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John Barleykorn said...


I would be happy for half that as an administrator. They don't even have to deal with nuisance properties.

Nick said...

Notice Regarding Advertising: This blog runs an open comments section. All comments related to blog entries have (so far) remained posted, regardless of how critical. Although I would prefer that those posting comments identify themselves, anonymous comments are also accepted.

The only limitation is that advertising posing as comments will be removed. That is why one or more of the comments posted on this blog entry, containing links to businesses, have been deleted. -- Nick