KEEP­ING HIS DIS­TANCE

Com­pen­sa­tion of the top ex­ecs at in­vestor-owned in­sur­ers out­paced that of the lead­ers at hos­pi­tals and spe­cialty care

Modern Healthcare - - FRONT PAGE - Beth Kutscher View photo gal­leries of the high­est-paid health­care ex­ec­u­tives, by in­dus­try sec­tor, at mod­ern­health­care.com

De­spite a drop of more than 15% in com­pen­sa­tion, Stephen Hem­s­ley, the low-pro­file head of united health Group, tops the an­nual list for the third year run­ning

Who says pay for per­for­mance hasn’t swept through the health­care in­dus­try yet? While it may not de­scribe re­im­burs­ing providers for out­comes, it does de­scribe the re­la­tion­ship be­tween the top ex­ec­u­tives of pub­licly traded health­care com­pa­nies and their re­spec­tive com­pa­nies’ fi­nan­cial per­for­mance.

De­spite last year’s un­cer­tainty re­gard­ing the fu­ture of the Pa­tient Pro­tec­tion and Af­ford­able Care Act, health­care in­dus­try lead­ers took home more money than those in any other sec­tor on the Stan­dard & Poor’s 500. Health­care ex­ec­u­tives in the in­dex earned a me­dian to­tal pay of $10.8 mil­lion, the high­est of any other sec­tor, ac­cord­ing to re­search from Equilar, an ex­ec­u­tive com­pen­sa­tion data firm. That rep­re­sented a 3.8% in­crease over 2010.

Within the health­care in­dus­try, there was sig­nif­i­cant vari­a­tion: Com­pen­sa­tion pack­ages for CEOs of in­vestor-owned hospi­tal chains, for ex­am­ple, took a hit last year, as hospi­tal stocks were bat­tered amid the fed­eral debt-ceil­ing cri­sis and con­cerns about a po­ten­tial fall­out that could af­fect Medi­care spend­ing.

In­sur­ers, in con­trast, had a some­what brighter run in the stock mar­ket, and ex­ec­u­tive com­pen­sa­tion pack­ages in the sec­tor seemed to re­flect that op­ti­mism. Lead­ers of for-profit long-term and spe­cialty-care providers also man­aged to rake in salary gains de­spite a more mea­sured per­for­mance on Wall Street.

Mod­ern Health­care’s an­nual re­port on ex­ec­u­tive com­pen­sa­tion looks at com­pen­sa­tion pack­ages for CEOs at the 10 largest com­pa­nies, based on net rev­enue, in three sec­tors—hospi­tal, in­sur­ers and spe­cialty care. The data was com­piled from an­nual stock ex­change fil­ings with the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion. The list ex­cluded com­pa­nies that pri­mar­ily pro­vide skilled-nurs­ing or as­sisted-liv­ing ser­vices.

An­nual com­pen­sa­tion in­cluded base salary, bonuses, re­stricted stock grants and changes in pen­sion and de­ferred con­tri­bu­tion plans as dis­closed in a com­pany’s an­nual re­port or proxy fil­ings. The list is a rank­ing of re­al­ized pay—it ex­cludes op­tion awards; to­tal com­pen­sa­tion is cal­cu­lated as the sum of an­nual com­pen­sa­tion plus net pro­ceeds that CEOs re­ceived as part of the sale of shares ac­quired through stock op­tions.

As a group, acute-care providers saw a de­crease of 29.9% in to­tal com­pen­sa­tion as their col­lec­tive mar­ket cap­i­tal­iza­tions took a beat­ing— and a tough oper­at­ing en­vi­ron­ment took some of the wind out of the sails of two ini­tial pub­lic of­fer­ings in the sec­tor: HCA and Van­guard Health Sys­tems, both lo­cated in Nashville.

In con­trast, spe­cialty-care provider CEOs saw a 45.2% bump in to­tal com­pen­sa­tion. While many post-acute and home-care op­er­a­tors saw their share prices run into trou­ble, DaVita, Se­lect Med­i­cal and Mag­el­lan Health Ser­vices re­ported gains—and their top ex­ec­u­tives were re­warded in kind (See ed­i­to­rial, p. 20).

In the payer sec­tor, ex­ec­u­tives at the helm of the in­vestor-owned health in­sur­ance com­pa­nies tracked by Mod­ern Health­care saw a 19.8% boost in pay, and all of the top 10 com­pa­nies wit­nessed share price growth av­er­ag­ing 36.8%.

Aaron Boyd, Equilar’s di­rec­tor of re­search, noted com­pa­nies have be­come more ag­gres­sive in set­ting goals for CEOs, and eq­uity awards have played an in­creas­ingly big­ger role in com­pen­sa­tion. They are also in­cor­po­rat­ing “to­tal share­holder re­turn,” or how much money is re­turned to share­hold­ers, as a per­for­mance mea­sure.

For the third year run­ning, the high­est-paid ex­ec­u­tive among the three provider sec­tors was Stephen Hem­s­ley, pres­i­dent and CEO of Unit­ed­Health Group, Min­neapo­lis, who earned $42.2 mil­lion. Hem­s­ley’s pay to­taled $13.4 mil­lion in an­nual com­pen­sa­tion and $28.8 mil­lion in ex­er­cised stock op­tions.

A Unit­ed­Health Group spokesman could not be reached for com­ment. Hem­s­ley’s an­nual com­pen­sa­tion was more than dou­ble the $6.3 mil­lion he earned in 2010, but he cashed in fewer stock op­tions for a lower re­al­ized com­pen­sa­tion pack­age last year.

The com­pany had a strong fi­nan­cial year, re­flected in a stock price that climbed 42.2% be­tween the last trad­ing day of 2010 and the last trad­ing day of 2011.

David Cor­dani, pres­i­dent and CEO of Cigna Corp., had the high­est an­nual com­pen­sa­tion among in­sur­ers at $16.4 mil­lion, but he ex­er­cised fewer stock op­tions than Hem­s­ley for a re­al­ized pay of $18.4 mil­lion.

Kent Thiry, chair­man and CEO of kid­n­ey­care and dial­y­sis com­pany DaVita, Den­ver, took home the high­est pay pack­age among spe­cialty-care providers and the sec­ond high­est over­all among all three provider groups. Thiry earned nearly $5.5 mil­lion in an­nual com­pen­sa­tion—a de­crease from his 2010 an­nual com­pen­sa­tion of al­most $9.4 mil­lion—but he ex­er­cised $24.5 mil­lion in stock op­tions, which re­sulted in an over­all pay gain of 91.6%. Thiry also topped the spe­cialty-care list last year.

“Our CEO’s com­pen­sa­tion is in­cen­tive­based,” DaVita spokesman Skip Thur­man said in an e-mail. “Nearly 90% of his 2011 com­pen­sa­tion was ex­er­cised eq­uity, all of which was set to ex­pire within the next year.”

Among acute-care CEOs, Wayne Smith, chair­man, pres­i­dent and CEO of Community Health Sys­tems, Franklin, Tenn., earned the high­est an­nual com­pen­sa­tion pack­age— $21.1 mil­lion, which was all in cash as Smith did not ex­er­cise any stock op­tions in 2011 as he’s done in pre­vi­ous years.

Community’s share price took the largest hit among health sys­tems in 2011, largely re­lated to the fall­out from its failed at­tempt to ac­quire Tenet Health­care Corp., Dal­las. Its mar­ket cap­i­tal­iza­tion fell 53.3% dur­ing the course of the year.

As part of Tenet’s ef­forts to stave off the takeover, the sys­tem filed suit against Community in April 2011, lob­bing al­le­ga­tions that Community had im­prop­erly billed pay­ers by us­ing short-stay ad­mis­sions in­stead of ob­ser­va­tion. That same quar­ter, Community saw its same­fa­cil­ity ad­mis­sions de­crease 5.6% quar­ter over quar­ter, and the com­pany’s ad­mis­sions prac­tices soon be­came the sub­ject of in­ves­ti­ga­tions.

As a re­sult of its share per­for­mance, the com­pany took mea­sures this year to ad­just pay­outs for its man­age­ment team. It dis­closed in a proxy fil­ing that its com­pen­sa­tion com­mit­tee took a num­ber of ac­tions, such as not in­creas­ing base salary or cash in­cen­tive com­pen­sa­tion for its key ex­ec­u­tives, re­duc­ing eq­uity awards and with­hold­ing a por­tion of 2011 cash in­cen­tive awards. It also added to­tal share­holder re­turn as a per­for­mance met­ric.

The fil­ing said the mea­sures “will continue to seek to en­sure that ex­ec­u­tive com­pen­sa­tion is prop­erly aligned with stock­holder re­turn.”

A spokes­woman for the com­pany de­clined to com­ment be­yond the proxy fil­ing.

Tenet Pres­i­dent and CEO Trevor Fet­ter, mean­while, came in sec­ond on the list of hospi­tal op­er­a­tors, earn­ing $10.7 mil­lion. He also did not ex­er­cise any op­tions. The com­pany’s share price closed 23.3% lower on the last trad­ing day of 2011 com­pared with the clos­ing price a year ear­lier.

A com­pany proxy fil­ing from this year also noted that ag­gre­gate 2011 com­pen­sa­tion for its top of­fi­cers de­clined com­pared with 2010, “which aligns with (the com­pany’s) pay-for­per­for­mance phi­los­o­phy.” It added that none of Tenet’s top of­fi­cers re­ceived an in­crease in 2011 base salary and pointed out that Fet­ter’s com­pen­sa­tion de­creased 11.5%.

As the high­est earner, Community Health’s Smith un­seated HCA Chair­man and CEO Richard Bracken, who last year took home $41.3 mil­lion—most of it in the form of an­nual com­pen­sa­tion.

HCA, which priced its ini­tial pub­lic of­fer­ing on March 10, 2011, at about $30 a share, did not main­tain its mo­men­tum, clos­ing the year with shares trad­ing about two-thirds of their IPO value (See story, p. 8). In com­par­i­son, Van­guard’s shares, which de­buted on the New York Stock Ex­change on June 22, 2011, were trad­ing 43.4% lower when they closed on the last trad­ing day of the year.

Bracken’s to­tal com­pen­sa­tion for 2011 was $8.5 mil­lion, in­clud­ing al­most $2.8 mil­lion in ex­er­cised stock op­tions, rep­re­sent­ing the largest CEO com­pen­sa­tion de­crease in all sec­tors. Yet the com­pany noted in a 2011 proxy fil­ing that Bracken’s 2010 pay was boosted by more than $21.7 mil­lion in cash dis­tri­bu­tions from vested stock op­tions.

Kevin Mur­phy, pro­fes­sor of fi­nance and busi­ness eco­nom­ics at the Univer­sity of South­ern Cal­i­for­nia’s Mar­shall School of Busi­ness, noted that stock op­tions pro­vide some hedge for per­for­mance, al­low­ing ex­ec­u­tives’ to­tal pay to rise or fall along­side the broader mar­ket.

“It cer­tainly seems like CEO pay in the S&P 500 health­care field has mir­rored CEO pay in the full S&P 500,” Mur­phy said in an e-mail. “There seems to be a slightly higher em­pha­sis on stock­based com­pen­sa­tion in health­care. Me­dian re­al­ized pay for 2012 is higher in health­care, but the av­er­age re­al­ized pay is sim­i­lar.”

Across the S&P 500, for-profit CEO salaries rose 6.2% and top ex­ec­u­tives re­ported me­dian to­tal com­pen­sa­tion pack­ages of $9.6 mil­lion, the Equilar re­port found. “We saw pay go up for the sec­ond year in a row,” across the S&P 500, Boyd said, adding that the past two years have coun­ter­acted the pay de­creases of 2008 and 2009. “It’s re­ally more of a re­turn to the more nor­mal changes we’ve seen.”

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