Pa­tient Qual­ity Play­ing Big­ger Role In For-Profit Exec Bonuses

Modern Healthcare - - NEWS - By Dave Barkholz

Ex­ec­u­tives re­cruited into the C-suites of for-profit health­care com­pa­nies can ex­pect their bonuses and at-risk com­pen­sa­tion to be in­creas­ingly pegged to per­for­mance on pa­tient qual­ity, safety and sat­is­fac­tion, ex­perts say.

Re­gion­alCare Hospi­tal Part­ners, an eight-hospi­tal for­profit sys­tem based in Brent­wood, Tenn., that is merg­ing with Capella Health­care, put pa­tient per­for­mance met­rics into its ex­ec­u­tive bonus for­mula three years ago, said Chair­man and CEO Marty Rash.

Pa­tients are go­ing to seek care where qual­ity and sat­is­fac­tion are high­est, Rash said. So, it was nat­u­ral for the Re­gion­alCare board of di­rec­tors and the board’s com­pen­sa­tion com­mit­tee to tie a dou­ble-digit por­tion of ex­ec­u­tive bonuses to at­tain­ing those tar­gets, he said. “If we say that our pur­pose and re­spon­si­bil­ity is to de­liver high-qual­ity care that is safe and com­pas­sion­ate, then it is im­per­a­tive that we align the way we eval­u­ate our lead­ers with our pur­pose,” Rash said.

The wide­spread adop­tion of de­tailed pa­tient qual­ity and ser­vice mea­sures in an­nual health­care ex­ec­u­tive bonus and at-risk com­pen­sa­tion plans is a fairly new phe­nom­e­non, said David Yang, prin­ci­pal at na­tional ex­ec­u­tive com­pen­sa­tion con­sul­tant Fred­eric W. Cook & Co., which has pub­lished a sur­vey of com­pen­sa­tion trends for decades.

Be­fore 2010, Yang es­ti­mates that no more than onequar­ter of the 20-plus largest pub­licly traded hospi­tal and health­care com­pa­nies told share­hold­ers in prox­ies or other fi­nan­cial fil­ings ex­actly how much the at­tain­ment of pa­tient qual­ity and sat­is­fac­tion goals would af­fect ex­ec­u­tive bonuses. To­day, the num­ber is above 50%, Yang said.

Prox­ies re­cently filed for up­com­ing an­nual share­holder meet­ings show such gi­ants as HCA, HealthSouth Corp., Kin- dred Health­care and oth­ers us­ing pa­tient qual­ity and ser­vice met­rics to de­ter­mine from 15% to 30% of an­nual per­for­mance bonuses for se­nior ex­ec­u­tives.

Th­ese large in­vestor-owned hospi­tal com­pa­nies are trail­ing be­hind their col­leagues in the not-for-profit sec­tor, who have had about a five-year head start, said Jose Pagoaga, man­ag­ing prin­ci­pal at Sul­li­van, Cot­ter and As­so­ci­ates, an ex­ec­u­tive com­pen­sa­tion con­sul­tancy spe­cial­iz­ing in health­care.

The rea­son is twofold. First, share­hold­ers of the pub­licly traded com­pa­nies mea­sure suc­cess by the re­turns they get on in­vest­ment. Stock­holder pres­sure forces th­ese com­pa­nies to em­pha­size fi­nan­cial mea­sures such as in­come on oper­a­tions and to­tal share­holder re­turn in set­ting ex­ec­u­tive bonus for­mu­las, Pagoaga said.

But there has been an­other dy­namic at play.

The not-for-profit sys­tems, which tend to be lo­cal or re­gional in na­ture, have been af­fected sooner and to a greater de­gree than their for-profit ri­vals by Medi­care’s push to value-based pur­chas­ing on care and other at-risk re­im­burse­ment trends that ei­ther pe­nal­ize or re­ward sys­tems for meet­ing qual­ity met­rics, he said.

The in­vestor-owned sys­tems, to some ex­tent, have been in­su­lated from th­ese trends by op­er­at­ing in very di­verse mar­kets, in­clud­ing those that have re­mained largely fee-for-ser­vice, he said.

But no mar­ket to­day is im­mune from at-risk con­tract­ing. Pagoaga said the items se­lected for re­ward­ing ex­ec­u­tives change “as op­er­at­ing em­pha­sis changes.”

HCA, the na­tion’s largest hospi­tal com­pany by rev­enue, was one of the ear­li­est in­vestor-owned hospi­tal com­pa­nies to be­gin peg­ging ex­ec­u­tive bonuses to qual­ity.

“In 2010, we added qual­ity-of-care per­for­mance as a con­sid­er­a­tion in our an­nual in­cen­tive com­pen­sa­tion pro­gram for ex­ec­u­tives, and since then, we have con­tin­u­ally struc­tured our in­cen­tive pro­grams to strengthen the link be­tween our ex­ec­u­tives’ com­pen­sa­tion and the com­pany’s com­mit­ment to de­liv­er­ing the high­est qual­ity care to our pa­tients,” HCA said in a writ­ten state­ment.

In 2014, HCA be­gan in­clud­ing spe­cific qual­ity-of-care and pa­tient-ex­pe­ri­ence met­rics, with 15% of top se­nior ex­ec­u­tives’

an­nual in­cen­tive based on qual­ity mea­sures in 2014 and 2015. That has been boosted to 20% in 2016, HCA said.

A lot of money can be at stake for ex­ec­u­tives at the largest for-profit firms.

HCA CEO Mil­ton John­son in 2015 was able to earn an an­nual per­for­mance bonus of about $4.3 mil­lion in cash and stock on a base salary of $1.3 mil­lion by achiev­ing bench­marks for EBITDA (85% of award) and pa­tient qual­ity and sat­is­fac­tion (15%). That doesn’t in­clude mil­lions of dol­lars more in long-term in­cen­tives such as stock awards.

Chief Fi­nan­cial Of­fi­cer Wil­liam Ruther­ford added a per­for­mance bonus of $1.3 mil­lion to his base salary of $750,000 and Chief Op­er­at­ing Of­fi­cer Sam Hazen $2 mil­lion on a base salary of $950,000, ac­cord­ing to HCA’s 2016 proxy.

The main qual­ity mea­sures are based on three ar­eas: pre­vent­ing hospi­tal-ac­quired con­di­tions; out­comes on stroke pa­tients, im­mu­niza­tions and a few other con­di­tions; and per­for­mance on cus­tomer sat­is­fac­tion sur­veys.

HealthSouth Corp., the re­ha­bil­i­ta­tion hospi­tal gi­ant, is an ex­am­ple of how health­care boards and their com­pen­sa­tion com­mit­tees are con­stantly re­cal­i­brat­ing what they con­sider to be the right mix of fi­nan­cial and qual­ity mea­sures in ex­ec­u­tive bonuses.

In 2015, HealthSouth, which has used qual­ity met­rics for se­nior ex­ec­u­tive bonuses since 2013, cut the per­cent­age that qual­ity played in ex­ec­u­tive bonuses from 30% to 20%.

That was a one-time event, said Ch­eryl Levy, HealthSouth’s chief hu­man re­sources of­fi­cer.

HealthSouth throt­tled it back a bit be­cause it was just ven­tur­ing heav­ily into home health­care, Levy said. The in­te­gra­tion of the home health busi­ness had the po­ten­tial to skew qual­ity mea­sures so it was deemed ap­pro­pri­ate to scale back for one year to fo­cus more on the fi­nan­cial per­for­mance of the com­pany, Levy said.

With that in­te­gra­tion well along now, the qual­ity per­cent­age was bumped back up to 30% for the or­ga­ni­za­tion’s top 15 ex­ec­u­tives in 2016, she said.

More­over, the com­pany in­creased the mix of qual­ity in bonuses for the next tier of ex­ec­u­tives. About 160 re­gional and hospi­tal pres­i­dents across the sys­tem moved to 40% in 2016 from 30% last year to fur­ther push im­prove­ments, she said.

The in­clu­sion of pa­tient qual­ity and ser­vice mea­sures in de­ter­min­ing ex­ec­u­tive bonuses will only be­come more wide­spread, said Tom Flan­nery, a part­ner at Mercer spe­cial­iz­ing in ex­ec­u­tive com­pen­sa­tion and per­for­mance. “It’s in ev­ery well-de­signed ex­ec­u­tive com­pen­sa­tion plan,” he said.

While fi­nan­cial per­for­mance still car­ries the most weight in de­ter­min­ing ex­ec­u­tive bonuses and over­all com­pen­sa­tion, con­sumers are judg­ing hos­pi­tals and health sys­tems not by how much money they earn but by the qual­ity of care and ser­vice they pro­vide, he said.

With the In­ter­net putting qual­ity and sat­is­fac­tion scores at the fin­ger­tips of pa­tients, those mea­sures are be­com­ing dif­fer­en­tia­tors in where peo­ple seek care and what providers’ in­sur­ers want in their de­liv­ery net­works, he said.

That doesn’t change whether the sys­tem is in­vestorowned or not-for-profit, Flan­nery said. “Af­ter all, they’re com­pet­ing for the same pa­tients and con­tracts.”

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