For what it’s worth
Executives’ earnings vary, but not necessarily based on organizations’ value
From volume to value is the industry’s current rallying cry as it attempts to shift from a system of paying per case to one that pays for results. Although that slogan typically is applied to reimbursement for patient-care services, it can be applied equally to executive compensation in healthcare. Increasingly, healthcare executives in the private sector—working at both investor-owned and not-for-profit companies and organizations—are being asked what value they return to their respective constituencies in return for the amount of money they’re being paid. It’s a common question in most other industries that’s now being asked in healthcare, and rightly so. But it’s a difficult question to answer as our editorial coverage of the topic illustrates.
This issue’s cover story, a group reporting project by Paul Barr, Beth Kutscher and Jessica Zigmond, ranks the highestpaid executives at the 10 largest investor-owned healthcare companies in three sectors: acute-care hospitals, insurers and specialty-care providers. Going beyond simply reporting some of the eye-popping compensation figures, the trio looked at how the executives’ respective companies did financially in the year the executives earned their paychecks. Of the 26 executives we had comparable data for:
Twelve saw their total compensation go up along with their company’s stock price.
Seven saw their total compensation go down along with their company’s stock price.
Five saw their total compensation go up even though their company’s stock price went down.
And two saw their total compensation go down even though their company’s stock price went up.
So what conclusions can you draw from that, other than you may not want to work for a company that pays you less as the company’s fortunes rise? In 19 of the 26 cases, the top executive’s pay followed the path of the company’s stock price. But in seven cases, or more than a quarter of the time, compensation and price per share took different paths. This assumes, of course, that “value” for a publicly traded healthcare company is the value provided to shareholders rather than the value provided to payers, patients or communities.
Meanwhile, in this issue’s special feature, reporter Ashok Selvam analyzes the results of our 32nd annual Executive Compensation Survey based on data provided to us exclusively from Sullivan, Cotter and Associates. He crunched the numbers from 41 executive positions at hospital systems and 26 executive positions at individual hospitals. He found that the average base pay for system executives rose 3.6% this year while the average base pay for hospital executives climbed 3.2%.
Both are running at least one percentage point above the Producer Price Index for hospitals published by the U.S. Bureau of Labor Statistics. The hospital PPI measures the change in net revenue for an episode of hospital care. For the 12-month period ended in June, hospitals’ net revenue was up just 2.2%. Though both revenue and compensation are up, compensation is rising at a faster clip. In this case, let’s pretend revenue is a proxy for value, assuming that payer and patients are willing to pay more for good care. If that’s true, you could argue that hospital and hospital systems executives are being overpaid for what they do for payers and patients—a position with which many industry critics would agree.
The bottom line is this: In most cases, it appears that executive compensation in healthcare is tied to financial performance. If providing value to payers, patients and communities is part of that equation, it needs to be more transparent to all stakeholders. And if a value component isn’t there, it should be. As it stands, compensation is still a volume game, whether it’s stock prices or patient utilization, and unless that changes, value will continue to be more of a slogan rather than a solution.