Bonuses still tied to bet­ter fi­nan­cials

Use of CEO pay in­cen­tives for qual­ity is un­even across for-profit hospi­tal sys­tems

Modern Healthcare - - NEWS - By Me­lanie Evans

Qual­ity-of-care per­for­mance means more to CEO pay­checks at some for-profit hospi­tal com­pa­nies than at oth­ers.

Among the five largest pub­licly traded sys­tems, Tenet Health­care Corp. and HCA go far­thest in ty­ing ex­ec­u­tive pay to qual­ity-of-care mea­sures. Still, use of qual­ity in­cen­tives—the cash awards that com­pa­nies re­serve for top op­er­a­tional and strate­gic pri­or­i­ties and that can dou­ble an ex­ec­u­tive’s salary—is un­even. At sys­tems that ex­plic­itly pay ex­ec­u­tives based on qual­ity, the weight given to in­cen­tives varies from 15% to 25%. Mea­sures of per­for­mance used range from those in­di­rectly re­lated to qual­ity, such as em­ployee turnover, to those widely ac­knowl­edged as cen­tral, such as rates of fa­tal health­care-as­so­ci­ated in­fec­tions.

But for an in­dus­try plagued with in­con­sis­tent pa­tient safety and out­comes, health­care has been slow to fo­cus top ex­ec­u­tives’ at­ten­tion on qual­ity by us­ing per­for­mance-pay in­cen­tives. This is ev­i­dent in com­pen­sa­tion of the pub­licly traded health sys­tems, which op­er­ate

1 in 10 U.S. hos­pi­tals and saw 3.8 mil­lion ad­mis­sions last year.

It’s prob­a­bly not sur­pris­ing that up to now fi­nan­cial mea­sures have dom­i­nated in­cen­tives for for-profit hospi­tal ex­ec­u­tives. “The em­pha­sis is, first and fore­most, fi­nan­cial,” said Thomas Kelly, a com­pen­sa­tion con­sul­tant for Tow­ers Wat­son.

But as more in­sur­ers and em­ploy­ers de­mand greater trans­parency and ac­count­abil­ity for qual­ity, hos­pi­tals in­creas­ingly must com­pete on pa­tient out­comes and safety. Re­search into in­cen­tive pay for top ex­ec­u­tives sug­gests that ty­ing cash to qual­ity met­rics may im­prove hospi­tal per­for­mance. And qual­ity pay in­cen­tives for CEOs are a highly vis­i­ble way for sys­tems to pub­licly demon­strate their com­mit­ment to qual­ity.

Pa­tients ex­pect qual­ity

Dr. Ana Pu­jols-McKee, ex­ec­u­tive vice pres­i­dent and chief med­i­cal of­fi­cer of the Joint Com­mis­sion, said hospi­tal sys­tems with in­cen­tive pay­outs ab­so­lutely need to in­clude qual­ity-of­care per­for­mance in ex­ec­u­tive pay. “In an en­vi­ron­ment where there will be a bonus or an in­cen­tive for per­for­mance, I don’t think it’s rea­son­able to have it based purely on fi­nan­cial per­for­mance,” she said. “Qual­ity is the prod­uct we’re pay­ing for as the con­sumers. That’s what we ex­pect.”

Dal­las-based Tenet, which op­er­ates 77 hos­pi­tals, awards 25% of top ex­ec­u­tives’ yearly cash in­cen­tives based on qual­ity, the com­pany’s Se­cu­ri­ties and Ex­change Com­mis­sion fil­ings show. To mea­sure per­for­mance, the sys­tem’s di­rec­tors track the same mea­sures used by Medi­care to pe­nal­ize or re­ward hos­pi­tals un­der the CMS’ value-based pur­chas­ing ini­tia­tive, such as rates of po­ten­tially avoid­able in­fec­tions. Trevor Fet­ter, Tenet’s pres­i­dent and CEO, also earns in­cen­tive cash if hospi­tal read­mis­sion rates drop and pa­tient and physi­cian sat­is­fac­tion im­prove. Fet­ter earned $1.3 mil­lion in in­cen­tive pay in 2013. Tenet’s chief fi­nan­cial of­fi­cer, hospi­tal pres­i­dent and gen­eral coun­sel have the same in­cen­tives.

While HCA does not place as much weight as Tenet does on qual­ity in­cen­tives, its mea­sures in­clude rates of cen­tral line-as­so­ci­ated blood stream and catheter-as­so­ci­ated uri­nary tract in­fec­tions. In­cen­tives also are tied to per­for­mance on the CMS’ core mea- sures for heart at­tack, heart fail­ure, pneu­mo­nia, surgery and im­mu­niza­tion as well as pa­tient-sat­is­fac­tion scores, SEC fil­ings show.

Last month, HCA, which op­er­ates 165 hos­pi­tals, added pa­tient sat­is­fac­tion and qual­ity mea­sures to its ex­ec­u­tives’ in­cen­tive cri­te­ria. Qual­ity will ac­count for 15% of the Nashville­based sys­tem’s 2014 an­nual cash in­cen­tive award for R. Mil­ton John­son, who was pro­moted to pres­i­dent and CEO from CFO af­ter Richard Bracken, chair­man, re­tired as chief ex­ec­u­tive last year.

Pre­vi­ously, HCA paid out bonuses based ex­clu­sively on earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion but al­lowed the board to use dis­cre­tion to dock up to 20% based on qual­ity per­for­mance. In 2013, the board did not dock any ex­ec­u­tive in­cen­tive awards based on qual­ity, ac­cord­ing to SEC fil­ings. Bracken re­ceived $3.3 mil-

lion as his in­cen­tive award last year and a salary of $1.4 mil­lion. John­son last year re­ceived $1.4 mil­lion in cash in­cen­tives with salary of $899,983.

“We were among the first health­care providers to tie our se­nior of­fi­cers’ per­for­mance bonuses to clin­i­cal qual­ity,” HCA spokesman Ed Fish­bough said.

Wil­liam Car­pen­ter III, CEO of LifePoint Hos­pi­tals, which op­er­ates 61 hos­pi­tals, sees one-quar­ter of his an­nual cash in­cen­tive awarded on qual­ity mea­sures that in­clude pa­tient-sat­is­fac­tion scores and com­ple­tion of pa­tient-safety plan­ning and a ques­tion­naire on pa­tient-safety at­ti­tudes, SEC fil­ings show. Car­pen­ter re­ceived an in­cen­tive pay­out of $1.5 mil­lion for fis­cal 2012 and a salary of $978,192.

Com­pen­sa­tion and qual­ity ex­perts say boards that tie ex­ec­u­tive pay to qual­ity make the or­ga­ni­za­tion’s com­mit­ment to qual­ity more ex­plicit.

Qual­ity is one el­e­ment con­sid­ered

At Franklin, Tenn.-based Com­mu­nity Health Sys­tems, which ac­quired Health Man­age­ment As­so­ciates in Jan­uary and op­er­ates 208 hos­pi­tals, di­rec­tors con­sider qual­ity re­sults as one el­e­ment of in­cen­tives tied to per­for­mance im­prove­ments, said spokes­woman Tomi Galin. Qual­ity mea­sures ap­proved by share­hold­ers in 2009, how­ever, are not bro­ken out ex­plic­itly as per­for­mance mea­sures. They in­clude pa­tient

sat­is­fac­tion and Joint Com­mis­sion sur­vey re­sults, CMS core mea­sures, physi­cian and em­ployee sat­is­fac­tion, and work­force turnover.

In con­trast, Uni­ver­sal Health Ser­vices, King of Prus­sia, Pa., re­lies solely on fi­nan­cial per­for­mance to award in­cen­tives that to­taled $2.3 mil­lion for Chair­man and CEO Alan Miller last year in ad­di­tion to salary of $1.5 mil­lion, SEC fil­ings show.

In the not-for-profit hospi­tal sec­tor, the use of qual­ity-based in­cen­tives for ex­ec­u­tive pay has rapidly pro­lif­er­ated in re­cent years. Two-thirds of not-for-prof­its in­cluded qual­ity in­cen­tives in top ex­ec­u­tives’ com­pen­sa­tion last year, up from 57% the year be­fore and 45% five years ear­lier, ac­cord­ing to a sur­vey by Sul­li­van

Cot­ter & As­so­ciates. David Bjork, se­nior vice pres­i­dent at the con­sult­ing firm In­te­grated Health­care Strate­gies, said he now rou­tinely sees clin­i­cal qual­ity and pa­tient sat­is­fac­tion in­cluded in at-risk pay for not-for-profit ex­ec­u­tives. “It’s so close to be­ing uni­ver­sal that it’s al­ways a sur­prise when you find an in­sti­tu­tion that does not use in­cen­tives at all,” he said.

Other pri­or­i­ties don’t score higher

For ex­am­ple, As­cen­sion Health, the na­tion’s largest not-for-profit health sys­tem, uses qual­ity mea­sures in an­nual and three-year in­cen­tive plans. An­nual in­cen­tives can in­crease ex­ec­u­tives’ salaries by 10% to 80%, and longterm in­cen­tives can in­crease it by an­other 40% to 100%. Qual­ity mea­sures are re­viewed and up­dated by the gov­ern­ing board an­nu­ally and are not over­shad­owed by other pri­or­i­ties, said Herb Val­lier, As­cen­sion’s ex­ec­u­tive vice pres­i­dent and chief hu­man re­sources of­fi­cer. “Fi­nance would not be weighted any more than qual­ity.”

Com­pen­sa­tion and qual­ity ex­perts say boards that tie ex­ec­u­tive pay to qual­ity make the or­ga­ni­za­tion’s com­mit­ment to qual­ity more ex­plicit. High-qual­ity hos­pi­tals were more likely

to have boards that iden­ti­fied qual­ity as one of the two most im­por­tant cri­te­ria for CEO eval­u­a­tion, com­pared with hos­pi­tals that scored lower on qual­ity mea­sures, a 2010 study pub­lished in Health Af­fairs found. But an­other study pub­lished this past Jan­uary in JAMA found no cor­re­la­tion be­tween qual­ity per­for­mance and CEO com­pen­sa­tion among not-for-profit hos­pi­tals.

Both for-profit and not-for-profit hos­pi­tals may find it in­creas­ingly dif­fi­cult, for both pub­lic re­la­tions and fi­nan­cial rea­sons, to ig­nore qual­ity when award­ing per­for­mance bonuses, con­sul­tants say. That’s be­cause hos­pi­tals are fac­ing an ac­cel­er­at­ing push by Medi­care and pri­vate in­sur­ers to tie hospi­tal and physi­cian re­im­burse­ment to qual­ity per­for­mance.

In ad­di­tion, pri­vate in­sur­ers and em­ploy­ers are sign­ing a grow­ing num­ber of agree­ments with hos­pi­tals to pay for qual­ity. Aetna is ex­pected to tie half its commercial re­im­burse­ment to per­for­mance by the end of 2014, up from 30% at the start of the year. On top of that, more in­sur­ers and em­ploy­ers

are of­fer­ing health plans that in­clude stronger fi­nan­cial in­cen­tives, such as high de­ductibles, for pa­tients to shop for high­qual­ity, lower-cost providers. Some large em­ploy­ers such as Wal-Mart are fly­ing em­ploy­ees to provider sites with demon­strated high qual­ity and com­pet­i­tive prices for cer­tain pro­ce­dures.

These mount­ing mar­ket pres­sures could force hos­pi­tals to be

more pub­lic about their com­mit­ment to qual­ity, and qual­ity-based in­cen­tives to ex­ec­u­tives are part of that, said Thomas Flan­nery, a com­pen­sa­tion con­sul­tant at Mercer. “It’s about the im­age you want to project to the mar­ket.”

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