Skip to main content

Healthcare Reform Revs Compensation in the C-Suite

 |  By Michael Zeis  
   December 05, 2012

This article appears in the November 2012 issue of HealthLeaders magazine.

At one time, compensation may have been a sleepy activity—administrative at its core, but hardly routine. The foundations for compensation are the written and unwritten agreements between employer and worker. At the executive level, both the demands and the compensation tend to be greater, and so it is essential to lay out clear expectations and a commensurate set of incentives.



Incentives shifting from financial to clinical

As the healthcare industry shifts from a fee-for-service foundation to one of value-based purchasing, executive compensation programs are affected, as well. Most enterprises attempt to base a portion of compensation on performance, providing a mechanism for emphasizing one's role in helping the organization meet its objectives. Leaders contributing to the 2012 HealthLeaders Media Executive Compensation Survey indicate that, overall, 80% of their compensation is base salary, while 10% is an incentive payment. The rest is retirement and noncash compensation.

Of the four items mentioned most frequently as being the basis for incentives, two are conventional financial targets—operating margin and financial efficiency. The other two are care performance metrics—clinical quality and patient satisfaction. As one would expect, more executives with clinical responsibilities cite clinical performance as an incentive. But patient satisfaction and clinical quality are among the top four items mentioned by individuals with administrative, operations, and finance responsibilities, as well as those with clinical responsibilities.

"With a move toward more of a value-based system, there should be more of a focus on at-risk compensation, moving toward a system where all of us—doctors, hospitals, and providers—are going to be taking on more financial risk in addition to the clinical risk of caring for patients," says Jeffrey M. Fried, FACHE, president and CEO of Beebe Medical Center, a not-for-profit health system serving Sussex County, Del., from a 210-licensed-bed hospital in Lewes and six other locations.

For this year and next, a financial measure, operating margin, tops the list of objectives on which incentives are based. The second- and third-most mentioned items are patient satisfaction targets and clinical quality targets. Even though 72% of respondents from health systems use clinical quality measures as incentives, 72% of that industry setting also use operating margin. But the ascendance of clinical measures as incentives is not a big-enterprise phenomenon.

"Whether it is a big system or a small system or a standalone hospital, we are going to have to be good at tracking performance measures, and tracking how we are performing, and providing incentives for people to achieve the levels that we want to achieve," says Fried, an Intelligence Report advisor. "Everybody is going to have to be good at that, or they are not going to survive."

Nearly all respondents (95%) agree completely or agree somewhat that their organizations need more incentives based on clinical quality performance. Dianna Grant, MD, vice president of medical management and chief medical officer of the 169-licensed-bed Advocate Trinity Hospital, which serves southeastern Chicago, says that incentives based on clinical performance are as important as financial measures. "We have demonstrated that if you do the right thing, you are going to make the financial measures," she states. But Grant cautions that finance executives may have a different perspective because, one way or the other, the financial foundation for much of the industry will continue to be based on patient revenue and cost accounting.

Executive skills in flux

The shift to value-based purchasing also is reflected in respondents' appraisals of skills executives need for success in the future. Ability at cost containment and achieving performance top the list of skills that support a non-CEO executive's success both today and in the five-year time frame. Skills deemed to be more in demand in the future will be the ability to optimize results along a continuum of care and the skills in physician alignment.

Now and in the future, chief executives need physician alignment skills, which are considered by 62% of respondents to be among the top three skills needed for a CEO to be successful. The second-most frequently mentioned item—skills at performance metrics—was mentioned by only 39%, which underscores the importance of the top item.

"If you are working in healthcare, obviously the ability to get along with physicians is a pretty important quality," says Paul Hensler, CEO of Kern Medical Center, a 222-bed acute-care county-owned teaching hospital in Bakersfield, Calif. "There is a strategic aspect to alignment: the CEO strategically thinking about the things that result in strong physician alignment for the future. Some of the things that are important for alignment sometimes are not very popular. You are taking people whose training and background is largely independent and trying to get them to come together as a team and work for the common good. The hope is that by building a better institution, their individual welfare is improved."

Increasing in importance in the future for CEOs will be skills at mergers and acquisitions, the ability to structure contracts for risk sharing, and leading the organization to provide services along a continuum of care. Judy Brown, executive vice president and chief operating officer for East Jefferson General Hospital, a 420-licensed-bed community hospital serving Metairie, La., explains that a broader set of collaborators requires a broader set of skills.

"You need to understand care partners' businesses and service lines, how they impact the health of the patient, how the care is given to the patient, and where the best place to give the care is," Brown says. "This means aligning with physicians and other partners, third parties along the continuum. Relationships are going to be very important."

As one might expect, most organizations have specialized needs. Alan Fisher, FACHE, CEO of the 40-bed Advanced Specialty Hospital of Toledo, a long-term acute care facility in Ohio, expects that, because of competition, CEOs will need marketing skills.

"The public is becoming more savvy," he says, "and they are looking for quality outcomes. Because of the competition we have in the specialty hospital space, it will be imperative in the future for a hospital to have sound benchmarking and quality programs, to demonstrate to the market that this model of care may be best suited for hospital systems by assisting in reducing their 30-day readmissions"

Increases expected

Half of the executives in our survey (53%) expect total compensation to increase next year. For most (56%), the amount of increase will be relatively modest, 3% or less. One-third (34%) will see increases of 4% or 5%. One-third (37%) expect no change in compensation in the coming year. Although the expectation of reduced reimbursements is challenging the industry to deliver more for less, it is important to remain competitive with compensation. As the incentive proportion of compensation increases, overall compensation may become more volatile, with the result that fewer will see standard year-to-year increases and some may experience declines from one year to the next.

Factors to manage in short- and long-term

Overall, 89% or respondents agree completely or agree somewhat that annual incentive milestones may be too short, and that time periods longer than a year may provide a better match with performance in light of the industry's shift in emphasis to overall population health.

Especially considering the nation's long-term financial slump and what can be at times a highly charged political discourse, healthcare executive compensation earns a degree of public attention. More than one-third (39%) agree completely or agree somewhat that the public's desire for transparency hinders their ability to offer competitive compensation packages. And more than half (53%) agree completely or agree somewhat that their need to focus on cost containment hinders their ability to offer competitive compensation packages.

"There will be pressures from outside organizations and the community," says Kenneth S. Lewis, MD, JD, CEO of Union Hospital of Cecil County, a 122-bed not-for-profit acute care hospital in Elkton, Md. "It will continue to be an area that is closely watched in all industries, and even more so in healthcare, as there are increasing pressures to ratchet down costs."

Also, more than half (53%) say the stalled housing market presents executive recruiting problems.

A fundamental change in compensation

Lewis sums up how the shift to value-based purchasing is driving a fundamental change in the basis for executive compensation: "Revenue always was a surrogate for growth and productivity. Now, what we are really looking for are measures of efficiency, good patient outcomes, cost management, and operating margin."

Boards are modifying executive compensation programs accordingly, linking broad strategic directions to specific objectives. Although there is general acceptance of the concept of value-based purchasing, many organizations will be challenged by various organizational and operational tactics, executive compensation included.


This article appears in the November 2012 issue of HealthLeaders magazine.

Michael Zeis is a research analyst for HealthLeaders Media.

Tagged Under:


Get the latest on healthcare leadership in your inbox.