The West Volusia (FL) Hospital Authority, an agency that pays for low-income families in the county to get primary healthcare, has hired the nonprofit Northeast Florida Health Services to fill primary health needs for checkups and treatment for chronic health problems. Members of the hospital authority said the new contract will serve more people for less money, partly because the company qualifies for federal funding that the former clinic operator did not. The savings will be reinvested into patient care, including bigger medical facilities, according to the Hospital Authority.
A particle accelerator, which employs protons to bombard cancerous tumors, has a total price tag well in excess of $100 million and is the latest example of technology's role in rising healthcare costs. To some, the particle accelarator is an example of the tendency by hospitals and doctors to adopt costly, and potentially profitable, technologies that may be no more effective than existing treatments.
HealthLeaders Media Finance Editor Philip Betbeze interviews Jim McManus, vice president of finance at St. Joseph Health System in Orange, California. McManus' chief responsibility is supply chain management. His hospital system began a system-wide supply chain initiative in 2001 and in a system that spends more than a quarter of a billion dollars a year on pharma and physician preference items combined, Mcmanus and his team were able to achieve big results.
For decades the for-profit, publicly-traded and not-for-profit, tax-exempt worlds have operated in vastly different ways. These differences included the board's oversight of, and types and amounts of, executive compensation, as well as the scrutiny that governance and executive compensation received outside of the board room.
More recently, stakeholders, attorneys general, government agencies and lawmakers have focused on executive compensation in both of these worlds, which has resulted in an ever-increasing number of shareholder proposals regarding executive compensation (e.g., "say on pay"), investigations by attorneys general into pay practices, as well as efforts by the Internal Revenue Service and the Securities and Exchange Commission to develop rules that increase the flow of information to the public while requiring organizations to be more transparent in their disclosures about executive compensation.
As a result of this "convergence" of expectations within boards of both for-profit and nonprofit entities, it has become more and more important for hospital boards and committees
to have an understanding of the compensation arrangements they oversee and the implications of these arrangements to their stakeholders
to understand the recent disclosure and governance requirements imposed on public companies
to be able to intelligently review and address the new compensation and governance disclosures in the revised Form 990.
Public company boards are now in the second year of the new proxy disclosure rules, and based on the review the SEC conducted on a select number of first-year proxy statements, companies have a number of issues that will need to be improved upon in the second year (including expanding the discussion on decisions around pay practices). Tax-exempt boards will be confronting the newly-released Form 990 and related schedules, which will be required to be completed for the 2008 year. These two sets of disclosures contain a surprising number of parallels as well as important distinctions. Moreover, changes in the Form 990 bring compensation disclosure requirements more in line with what is expected of public companies in their proxy statements.
More alike than different Proxy statement compensation disclosures require a comprehensive review of the compensation philosophy, a discussion of the compensatory elements, and the decisions made regarding compensation, for each of the company's "named executive officers," in the "Compensation Discussion & Analysis" of the proxy statement. Since the committee that oversees executive compensation must review and discuss the CD&A with management in order to recommend to the board that the CD&A be included in the proxy statement, the committee needs to have a solid understanding of what the company pays its executives, why it provides each item of compensation, and be able to provide the rationale to support their decisions during the year.
In contrast, the new Form 990 requires "yes" or "no" responses to a series of questions that get to whether the organization has a process in place which requires that independent directors make compensation decisions on officers or key employees, using comparability data to assist in the decision-making process. The organization also must describe the process in detail on a separate schedule to the form.
While not requiring the depth of discussion that the CD&A entails, the new Form 990 requires that the committee understand the process by which decisions are made (and implicit in this requirement, what the compensation decisions were and why). This depth of knowledge will assist the committee members in responding to any inquiries regarding compensation that they may need to address (such as from reporters). This level of detail regarding process is new to Form 990.
The proxy statement must disclose detailed compensation information on each of the named executive officers (in general, the chief executive officer, chief financial officer, and the three highest-paid executive officers). This information covers a rolling three-year period, and includes every element of compensation provided or available to the officer. This information is disclosed in a number of tables, accompanied by detailed footnotes and relevant explanatory sections that relate to the items of compensation being disclosed in a particular table.
In the current version of Form 990, only three "buckets" of compensation are required: "Compensation Paid," "Contributions to Employee Benefit Plans," and "Expense Account & Other Allowances." These do not require explanatory footnotes or sections, although organizations have provided them as they deemed necessary.
In the new Form 990, these three categories of compensation have been significantly expanded. The information that must now be disclosed includes:
Whether any current or former trustees, directors, officers, key employees or highly compensated employees are provided one or more of a number of listed "perquisites"
The design of any incentive plan(s)
Base salary for identified individuals (see first bullet)
The amount of bonus or incentive compensation
Whether a deferred compensation arrangement is in place and how much was provided to the individual
What other compensation or benefits were provided
To answer these questions, the committee must have a thorough understanding of the compensation program.
At this juncture the question can be asked: If someone in management is completing the form, is the implied level of requisite understanding of the executive compensation program and governance process really necessary?
Both the short and the long answers are "yes." First, the new Form 990 asks whether the board has reviewed the completed form: To answer in the affirmative, the committee needs to know that the responses on the compensation areas are correct. Second, stakeholders of the organization expect that the board members responsible for executive compensation oversight are making informed decisions (see the process questions discussion, above) and are familiar with each compensation element and how they interrelate. To meet this level of expectation, the committee, in theory, should be able to respond to the governance and other non-quantifiable questions presented in the Form 990 and be able to obtain the appropriate amounts from the organization to complete quantifiable questions.
The new Form 990 compensation disclosures require significantly more process and quantifiable information than was previously required. As a result, the new Form 990 moves the organization and the committee overseeing executive compensation to a level of responsibility, knowledge and ownership that is more akin to that of publicly-traded companies than ever before.
What can you do? As a board member responsible for overseeing executive compensation decisions, you can:
Require an education session that provides an overview of the new Form 990 and the specific compensation issues that must be addressed
Review the organization's current compensation program and its elements, the compensation philosophy and the governance process around decision-making, and identify any issues that need to be addressed (for completing the form or otherwise)
Understand the rationale for each compensation element, test against market practices and current organizational strategy and compensation philosophy, and confirm the ongoing appropriateness of the element or change as necessary
Request management to provide a "mock-up" of the new Form 990's compensation items to test whether any "red face" items would occur
The disclosure changes required by both the IRS and SEC in the for-profit and tax-exempt worlds promote transparency in the decision-making process as well as more robust disclosures of an organization's compensation program and its elements. By understanding that these worlds have moved closer together as a result of these changes, you will be better prepared for the heightened expectations of the organization's stakeholders that you and the other members of the committee are making informed, knowledgeable compensation decisions that are consistent with the organization's mission, strategy and compensation philosophy.
Jim Otto is a senior consultant and leader of Hay Group's Southeast Region Healthcare practice. Eric Turzak is a Senior Consultant in Hay Group's Executive Compensation practice. They may be reached at james.otto@haygroup.com and eric.turzak@haygroup.com, respectively.
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Everyone knows that nonprofit hospitals have to invest to help make that all-important 3-to-4% (in a good year, 5%) margin. Most certainly don't make that margin on operations alone. In putting a hospital's investment pool to work, it helps to be able to make a good return, but it's also important to safeguard that principal.
Traditionally, that means mostly safe fixed-income investing, with a smattering of equities thrown into the mix just to keep things interesting. But increasingly, as hospitals are forced to operate on tighter and tighter budgets, bad debts from patients pile up, and reimbursements decline, it helps to make a little more money on the investment pool than fixed income will provide. But that, of course, requires more risk.
Depending on the size of the organization, some hospitals and health systems have gotten quite sophisticated about managing their investment pools for the right balance of safety and risk--hiring sophisticated investment managers or outsourcing that function--to better their return. Over the years, a few hospitals and systems have gotten into serious trouble by making big sector bets that didn't pay off. The results have been punishing to their bottom line and their investment pools.
But hospitals never got into venture capital investing--until now. If you can stand the mixed metaphors, more and more are upping the ante and swimming with the sharks in the deep end of the pool.
Honest, I'm not trying to toot my own horn here (okay, maybe just a little) but if you haven't seen it yet, take a look at my cover story for the March issue of HealthLeaders magazine. It details how some aggressive organizations are funding venture capital investments, no question one of the riskiest forms of investing out there. But despite the increased risk--at least to the portion of the investment pool that they invest this way--these hospitals are not betting the farm on one number of the roulette wheel.
I wrote this story because I kept running across more and more hospitals and health systems that were getting involved, in one form or another, in venture capital investing. By definition, venture capital investing requires heavy risk-taking in startup companies. It's kind of like fishing. Many of these early-stage startups will simply eat your bait, sucking down gobs of capital. The ones that hit and stay on the line, though, can be hugely profitable.
In reporting the story, I wasn't so much surprised that hospitals were taking bigger risks on venture capital firms. What I was a little surprised to learn was their point of view about the risks of this type of investing. They're not just investing on the belief that they will get a few quick hits from cashing in their stakes in successful companies that rise from their investment. They're hoping to be on the front end of testing and developing technologies and services these companies develop that will help their hospitals or systems run better--a return that might far outweigh any direct monetary return from investments in the companies themselves. In a sense, they hope they're investing in products and services that will help their organizations run more efficiently. That's an aspiration I think we all, as healthcare consumers, can cheer.
It's risky business, but for now, nonprofit healthcare's investment in venture capital appears here to stay. Here's hoping that healthcare lands a few whoppers.
The American Telemedicine Association is organizing regular conferences and forums on telemedicine practices and the telemedicine industry that attract individuals from across the telehealth spectrum: researchers, practitioners, vendors and patients.
The Office of the Coordinator of Health Information Technology plans to integrate a national network of electronic health records with healthcare databases launched by Google and Microsoft. The Office also plans to expand its Nationwide Health Information Network to include electronic health records stored in networks operated by the departments of Defense and Veterans Affairs, the Indian Health Service, and integrated healthcare systems that span numerous communities.
Barry Arbuckle, CEO of MemorialCare Medical Centers in Long Beach, CA, talks about the importance of developing quality measurement tools that are as robust as financial measurement systems that have been in place for years. Arbuckle argues that the two metrics are becoming tied closer and closer together as hospitals are more frequently rewarded financially for quality patient outcomes.
A nonprofit foundation affiliated with San Francisco General Hospital has won a $2.26 million grantto upgrade the public hospital's IT system and install software to help slash medication errors. The grant will fund two major projects at San Francisco General:
the expansion of the hospital's computer capabilities through the purchase of a mobile data center to boost server capacity and allow it to implement various IT projects to improve patient care
the implementation of electronic Medication Administration Records software, which officials say will improve communication between nurses and the hospital's pharmacy, eliminate medication transcription errors and reduce the number of early, late and missed doses of medication
A Netherlands-based digital security firm has begun to roll out Algeria's first e-health project. A pilot project comprised 700,000 smartcards in five regions of the north African country. The system will result in the issuing and management of seven million smartcards used by healthcare beneficiaries and providers. The aim is for hospitals and other healthcare institutions to securely manage patient records securely and to verify patient benefits.
