This article appears in the March 2013 issue of HealthLeaders magazine.
In the years to come, experts may look back on healthcare reform as the time that not only made improvements in the quality of patient care and sparked efforts to reduce costs, but also when doctors traded their independent practices for hospital employment. There's been a marked uptick in the pace with which physicians are being employed by hospitals; in fact, employment of physicians and surgeons is expected to grow by 24% from 2010 to 2020, nearly twice the rate of growth for all other occupations, according to the Bureau of Labor Statistics.
"[Organizations] have to grab the opportunities when they occur. I'm not referring to buying practices; I'm just referring to employing physicians," said Robert Shapiro, CPA, senior vice president and CFO for North Shore-Long Island Jewish Health System in Great Neck, N.Y. The system employs 2,600 physicians in a teaching environment, and one-third of those were hired in the past 18 months. Shapiro was one of 30 healthcare finance leaders to attend the 2012 HealthLeaders Media CFO Exchange and offer his thoughts on a variety of topics, including
physician employment.
"We are getting ready for what we feel is the future," Shapiro said. "The thing is, if you truly believe that things are changing quickly in your market, then you have to act. Your marketplace will dictate how quickly you act and how much you spend. But after that we have to go through a process of rationalizing what people are doing, making sure that redundancies are dealt with. I know it sounds like 'buy now, figure it out later,' but the market is very competitive in the downstate New York City area."
Although counterintuitive, if rushed, employing a physician can actually decrease organizational alignment and ultimately impact the bottom line. If the hospital's financial and clinical goals aren't clearly defined and the physician's rationale for employment isn't clearly understood, then the employment arrangement can be disjointed from the outset, causing poor performance or an expensive termination of the agreement. To avoid this, there are several areas healthcare leaders should examine before entering into an employment arrangement.
Reasons physicians seek employment
The fervor by physicians to become employed stems from the decline in reimbursements as well as the increase in practice expense and the complexities associated with adding electronic medical records and tackling billing changes. While understandable, some in healthcare believe it also may signify the near demise of the independent physician.
Statistically, the medical staff model of working with independent physicians is in decline, according to the September 2012 HealthLeaders Media Intelligence Report, Physician Alignment: Integration Over Independence. While the medical staff model is currently used by 67% of organizations, that will drop in three years to 50%, the report shows. The change in the healthcare environment is causing seasoned and green physicians to make a flight to safety by working
for hospitals.
There are advantages and disadvantages to hiring less-experienced physicians; the same is true for bringing on more experienced doctors. However, friction can arise if the hospital's goals compete with the physician's. While hospitals, for the most part, are looking to add physicians to broaden networks, fill service line gaps, reduce redundant testing, improve patient referrals, and reduce costs by improving care coordination, physicians' objectives often are more personal.
Newly minted physicians are displaying a generational shift in their overall work philosophy. They want to be employed following residency not only to focus more intently on patient care but also to give their lives stability. Newer physicians don't have the desire to continually work 80-hour weeks and instead strive for a work-life balance, says Britt Berrett, PhD, president of Texas Health Presbyterian Hospital Dallas, an 898-licensed-bed acute-care hospital with more than 800 employed physicians and physician extenders within the Texas Health Resources healthcare system.
Recognizing the mind-set of the generation you're hiring, Berrett says, is an ingredient that shouldn't be overlooked. Moreover, while hospitals may wish to hire a physician to fill a service line gap, a new physician won't come with an established patient base, which can slow referral revenue and productivity.
"The new generation of physician has significantly different expectations than physicians of the past," Berrett says. "These physicians have a tremendous desire for work-life balance, and it seems the lion's share of these new physicians prefer the stability of being part of a bigger system."
More experienced and established physicians also bring their own pros and cons. The changes in healthcare are making the small practice setting more administrative and disenfranchising these doctors from maintaining their own practices. It's now more expensive and even more time-consuming to operate a practice. Employing these established doctors means a hospital must create a contract that provides financial security but also allows for autonomy. And a greater challenge lies in guiding the physician toward meeting the organization's goals.
"Some of these physicians want to slow down and have some more personal time, but what we find is more often the physicians who have been in practice for a while want to concentrate on the complexities of medicine and don't want to deal with the changes to the revenue cycle and the billing. Gone are the days when the physician's spouse could do all the billing," notes Berrett. "These folks are coming to us to provide the backbone and infrastructure they need to keep their focus on practicing medicine. They want to use their MD and not have to get an MBA to do it."
Employment versus joint venture
Berrett says that employment, as opposed to a joint venture, offers the physician and the practice other benefits such as better pricing on an IT platform and more sophisticated revenue cycle and collections.
In addition, the strength of employment comes from having a contractual tie to an individual, whereas a joint venture tends to be with an entity that has multiple partners. "Sometimes an employment agreement with a singular physician can be less complicated and move forward more easily than trying to create a joint venture," adds Julie Manas, president and CEO of Sacred Heart Hospital in Eau Claire, Wis., and division president and CEO of the Western Wisconsin division of Hospital Sisters Health System. The 344-licensed bed acute care Sacred Heart is an affiliate of the Hospital Sisters Health System.
Sacred Heart employs just 20 physicians and adds to those numbers judiciously based on market factors, Manas explains. Sacred Heart is situated near the Marshfield and Mayo clinics as well as the University of Wisconsin-Eau Claire medical school and the OakLeaf Surgical Hospital and Medical Network, a 200 physician-owned organization.
"Having 20 employed physicians may seem low, but that's nearly doubled from what we had recently—mostly in primary care. Employing wasn't something we've done. We have approximately 300 physicians practicing with us, but many of the physicians are on the clinical council at other hospitals or have joint ventures with other organizations. We have to be mindful of our market and the need."
Employing physicians can seem like a great option, notes Manas, but it's not always the best one. James Jarrett, president of the New Jersey ProCure Proton Therapy Center, part of ProCure Treatment Centers based in Bloomington, Ind., agrees, noting that joint ventures can offer a different level of motivation for physicians. The New Jersey facility opened in March 2012 and Jarrett was responsible for staffing. With a private equity background, he had the bottom line firmly in mind when the organization opted to not employ physicians, instead favoring partnerships.
"We don't employ any physicians in this entity, though a lot of doctors do ask me about it, as do a number of our hospital partners. Employing physicians is very much top-of-mind. But we partner or use joint ventures with our physicians," he explains. Our doctors are part owners, and we feel it will drive better longer-term patient care behavior."
Though the joint venture agreements vary based on geography and state laws, physicians with ProCure don't have to participate in the business side of the operation and are concentrating on treating patients. Jarrett notes, however, that for previously independent physicians these arrangements can allow the doctor more independence while encouraging them to help the organization grow.
"Employed physicians may find they have to participate in broader health system initiatives, and not every person will agree with every initiative. Doctors may be expected to keep referrals in-network, or the physician may have certain objective targets to meet. It can give the physician an overall feeling that they are being driven by profit, whether that's true or not," says Jarrett.
Reform and the ROI equation
Mark Browne, MD, MMM, CPE, FACPE, is senior vice president and chief medical officer at Covenant Health, a Knoxville, Tenn.–based system that includes seven acute care hospitals in East Tennessee and employs 125–150 physicians, 70% primary care and 30% specialty. He notes that defining the clinical and financial rationale for employing physicians is still driven by the market demand and clinical need to fill service line gaps.
"We have to assess the clinical need for the community. Employment is rarely our first choice, but given a particular physician or the circumstances, such as an underserved population in a particular specialty, then we certainly put employment on the table, but we want an agreement that leads to strong long-term alignment," says Browne.
Still, healthcare organizations need to make margin, and attaining an ROI for these physicians is important. "These days, the best way for us to measure ROI is by tracking the quality of care of the physicians, though that doesn't always visibly connect with the financials. Part of the secret sauce is to partner with a physician who wants to achieve the same outcomes you want. That leads to better ROI and lower costs," says Browne. "Tracking the ROI from physician employment isn't as linear as buying an MRI and tracking use."
Under pay for performance, finance leaders could measure the financial success of a physician-hospital partnership in a relatively simple equation: how much was spent to onboard a physician, plus salary and benefits, plus overhead minus the amount of revenue per patient that the physician generated. Though it could take three to five years for newly employed physicians to generate revenue that exceeded the cost of hiring them, it was nonetheless measurable. Under health reform, with the focus on population health and the shift away from volume to quality outcomes, discerning the financial value of a new hire can be elusive. While many payers are not yet reimbursing for better-quality care, physicians are beginning to be tracked by quality and patient satisfaction metrics that are not yet tied to all payer contracts and can add to the challenge when calculating ROI.
"When it comes to ROI for physicians you have to decide what the successful partnership is going to mean for the organization. Is it the financial aspect of a practice? Is it clinically how well they are doing based on metrics? We look at patient satisfaction and physician satisfaction, and we also compare physicians against one another," says Manas. She adds, however, that a strong business case is an essential that is sometimes overlooked by hospitals where the marketplace is aflame with zeal to employ.
"There has to be a business case. You need to look at the financial metrics of employing versus partnering, and then you also need to clearly define what you will use to gauge the measure of success for this pairing," she says. "You also need to consider not only the dollar impact but the political one, too. If you're hiring a direct competitor for a practice that's been supporting your system in the past, you could alienate that practice. You need to be able to fully articulate the reasons why you are employing versus partnering or joint venturing, and how employment will better serve your community."
Establishing alignment plans
Collaboration, communication, and metrics: These three words need to be included in all discussions with potential employees and in employment agreements. Creating a strong hospital-physician alignment entails building upon shared objectives and goals, and knowing how these are being measured is a cornerstone to a mutually successful relationship, says Browne.
"Our organization has a spectrum of employment arrangements," says Browne. "Growth for us is happening in the specialist arena in terms of physicians seeking employment and where we're seeking physician to employ."
Browne took on the role of systemwide CMO in October 2012 with the assigned task of building relationships with doctors and providing leadership in the areas of quality, clinical effectiveness, system integration, informatics, and the development of service lines. He was chosen, in part for his background as a principal with healthcare consulting firm Pershing Yoakley & Associates, which would give him a broader perspective of employment agreements from both an administrative and clinical perspective.
"At the end of the day I'm a physician, and I come back to that. There are a lot of employment models out there … and there are different tactics you need to consider to further the alignment strategy," he says. "First, you have to look at the differences in physicians from different generations … and we know we have to create agreements that are based on performance standards, not just productivity."
Browne says the difficulty in creating alignment between physicians and hospitals often rests with the lack of timely and accurate clinical data, especially if you are going to create risk-based employment agreements.
"Physicians want to know, like anyone else, how they are measured and how they are doing if they are going to take on any risk. They need to be clear on how they will be measured and tracked, so you have to choose metrics that are reasonably easy to reproduce—and you don't want 15 metrics, you want two to four," he says. "To encourage that alignment, there's got to be a lot of conversations on the front end about how we can agree to hold each other accountable on quality, and you need to put it in the contract."
Also, Browne says the contract needs to be relatively simple and easily understandable, and should include both achievable and stretch goals. "We're openly sharing the metrics we're tracking with our physicians so we can learn from each other, but it's a work in process with population health," says Browne.
Ultimately, when it comes to deciding whether to employ a physician, Browne and Manas agree it shouldn't be rushed, nor should it be done to keep pace with other hospitals in the marketplace.
"When organizations move too quickly and believe the physicians are in agreement with their goals and that there will be an alignment, but then realize after the fact that there wasn't agreement, it will cause problems," says Manas. "There's a lot of pressure within the marketplace to employ, and organizations sometimes make decisions based on the frenzy in the marketplace and not based on their due
diligence."
To be successful, Browne says, employment has to fit not only the physician, but also the healthcare organization. "Some systems employ the majority of their doctors, and for other systems that model doesn't fit into their strategy; for us it's not the only option," says Browne. "Still, physician employment needs to remain in the toolbox as an option, and if and when the timing is right for an organization, then it can be the right move."
Reprint HLR0313-8
This article appears in the March 2013 issue of HealthLeaders magazine.
This article appears in the January/February 2013 issue of HealthLeaders magazine.
As healthcare CFOs devise plans to counteract thinning reimbursements and diminishing margins, many are finding that energy-efficiency choices are helping to help solidify long-term, sustainable cost reductions.
"It does cost a bit more now to be energy efficient if you compare energy prices today to the cost of making the changes. But if you're a betting person you know that the energy prices will go up. So spending more today is a hedge against the future prices," says Mike McDevitt, executive vice president for facilities and technology at the Birmingham, Ala.-based Children's of Alabama, which constructed a 12-story hospital employing numerous energy-conservation strategies.
Healthcare organizations spend nearly $8.8 billion on energy each year to meet patient needs, according to the Environmental Protection Agency. Moreover, the quadrennial 2007 commercial buildings energy consumption survey by the U.S. Energy Information Administration shows that major fuels—including electricity, natural gas, fuel oil, and district heat—used by large hospitals (those greater than 200,000 square feet) account for 458 trillion BTUs of energy, accounting for 5.5% of the total delivered energy used by the commercial sector.
Both the energy and healthcare communities largely attribute this massive consumption of energy to the number of aging hospitals and health systems along with the general nature of how these organizations must operate—continuous operating hours and thousands of patients, visitors, and employees consuming energy all day, every day of the year. With an eye on potential savings in energy and money, some healthcare organizations are reassessing how they construct new facilities and looking for ways to modify their existing operations with minimum capital outlay.
Environmentally conscious expansion
In August 2012, Children's of Alabama completed the transition into its new $400 million expanded facility—the Benjamin Russell Hospital for Children. The project was the culmination of three years of work, resulted in a total of 332 beds and 48 NICU bassinets, and placed Children's of Alabama in the top 10 pediatric medical centers based on bed count. Currently the organization has an application pending for Leadership in Energy and Environmental Design certification. If it receives it, that would make the organization the first hospital in that state under LEED version 2.2 for new construction.
"This hospital cost us a little more to build, but it's going to get us a return thanks to our energy-saving strategies—some of those [returns] will be quick and some of them will be over the life of the building," says McDevitt, who oversaw the hospital's green design and construction. Pursuing a LEED design and approach cost the project approximately $2 million-$3 million more than taking a traditional design approach; however, McDevitt notes that a philanthropic contribution for that amount was given and earmarked for Children's to use to pursue LEED.
Bolstered by the knowledge that taking a green approach wouldn't cost the organization more than a traditional one, the organization pressed forward with its plans. McDevitt says its other facilities had already attained a lot of its operational low-hanging fruit, so when it looked to build another facility, it wanted to optimize any and all opportunities for efficiency.
"The CFO and I came up with an internal rate of return for selecting our energy conservation projects," he explains. "I asked our CFO, 'What should we expect to get as internal rate of return?' He looked at the potential savings for each project that we proposed and determined that if we got a 6%-7% rate of return on every dollar over and above our normal operations over 10-12 years, that would be reasonable. So that was our objective, and the directive I gave to the designers was to look for projects that offered the biggest bang for the buck."
Designers concentrated on using energy-efficient and environmentally responsible materials, says McDevitt, such as recycled mirrors and seashells in the terrazzo floor of the hospital. It also used local materials wherever possible, selected recycled raw materials for construction, and recycled 30%–40% of its construction project waste materials to help reduce the environmental footprint of the project.
Even the orientation of the building was factored into its ability to conserve energy. The building uses a north-south orientation that, when paired with the structure's large glass windows, allows plenty of natural light into the building, increasing warmth and light for the facility.
Also, 30% more energy-efficient mechanical systems were installed and an innovative heating and cooling system was added. The hospital's heating and cooling mechanism collects 30,000 gallons of condensation from its air conditioning system and recycles it for irrigation and to cool equipment. The facility also uses a rooftop garden with native sedum to provide insulation and oxygenation for the building. The design is energy efficient, requires less maintenance, and provides long-term cost savings.
"Typically our existing plant [of 700,000 square feet] costs us $3 million per year; this new plant is large at 700,000 square feet of space and is using 20% less energy," says McDevitt. The new facility is so efficient that the older structure is now getting much of its heating and cooling energy from the new one. "Because of our green projects we have a raw energy cost savings of 25% in our overall campus. This has really been a big win for us."
The project succeeded on an environmental level and a financial one, McDevitt says. The internal rate of return for many of the projects selected far exceeded the 6%-7% rate of return over and above operations that the organization was aiming for, hitting rates of return of as much as 20%-30%.
Sunny bottom line
While Children's of Alabama expects to see long-term returns for its energy investment, it still needs to use some of its own capital spending budget to help develop its building. However, at other organizations, getting healthcare leaders to consider energy conservation projects in lieu of clinical projects can be a challenging discussion. Finding a creative way to finance the energy conservation pursuits can eliminate the discussion and free up capital dollars for other efforts.
"Hospitals need to invest in medical equipment so when capital is allocated, that's usually where it goes," says Robert Mulcahy, vice president of facilities and environment of care at Saint Peter's University Hospital in New Brunswick, N.J. "There never seems to be enough money to invest into these green projects as aggressively as we need to."
However, Mulcahy knew there could be real financial savings in energy reductions for his 478-licensed-bed hospital if the $448 million net revenue organization could find a way to make the capital investment. With a tight capital budget, though, the organization had no intention of pursuing an energy conservation operations project—that is, until PSE&G, a Newark, NJ-based utility company offered a program that when combined with a federal grant would underwrite 90% of a $9 million solar-panel project and cost Saint Peter's just $1 million in capital dollars to complete.
"The only reason we even looked at this program was to hedge on future energy prices because we have a great utility rate," says Garrick Stoldt, vice president and CFO for Saint Peter's. "Frankly, I was really skeptical at first of the PSE&G pitch, as I've seen a lot of utility companies say they have a great program and it turns out to be a loan. But once the utility company walked through all the pieces of this program, I realized doing it was a no-brainer."
Saint Peter's funded 30% of the project though a federal grant and another 60% of the funds came from a 15-year, 11% interest loan paid through tax credits that was part of the PSE&G solar loan program. The loan program works by covering 40%–60% of the cost of a system with the remainder being financed separately by the customer. The actual maximum loan amount is based on how much energy the recipient's system is potentially expected to produce over the term of the loan.
The loan recipient can repay the loan through cash payments or by signing its Solar Renewable Energy Certificates over to PSE&G—which is the option that Saint Peter's selected. An SREC is a unit of power and is equivalent to one megawatt-hour of solar electric generation under the state's trading system.
For the nonprofit Saint Peter's to participate in this loan program, in which it was selling power from its solar panels back to PSE&G to repay the loan, it had to create a for-profit energy entity. Fortunately, the organization had a defunct but taxable durable medical equipment company on the books, which it repurposed to pursue this path. Also, under state law, as an energy provider, Saint Peter's is required to sell its SRECs back to its main supplier, PSE&G, which is how the loan is repaid. The value of an SREC can vary according to market conditions; Saint Peter's SRECs are currently valued at $350 each as part of the contractual agreement with the loan.
"So assuming that price is never greater than $350 per SREC, that loan will be 100% paid off, including tax credits, in 15 years," explains Stoldt.
Thanks to the PSE&G loan program and the federal grant, Saint Peter's has installed 10,000 solar panels on four of its buildings and two large parking lots. The solar panel system generates 2.3 million kilowatts of electricity, enough energy to power an estimated 230 homes. More important, the panels produce enough power to provide 100% of the daytime electricity for its nursing home and 30% of the power for the hospital.
In addition to adding solar power, Saint Peter's also looked to reduce its carbon footprint in other ways. It took advantage of a public utility-sponsored, free energy audit and uncovered other projects that could reduce its cost over three to five years. The organization decided to make another $4.8 million in energy-saving upgrades. To cover these costs, it tapped a Board of Public Utilities of New Jersey hospital efficiency program that includes a grant that pays for 75% of the upgrades, as well as a 25% interest-free loan (repaid through its utility bill).
The funds allowed the organization to add light sensors to reduce electricity use, replace water chillers and piping to make the air conditioning system more efficient, and add high-efficiency burners on the boilers to reduce pollution and reliance on oil. Just replacing the boiler burners and other energy programs saved the organization more than $500,000 in energy costs in one year, and it renegotiated its commodity rate to save another $300,000, explains Mulcahy. All told, these efforts produced $1.6 million in savings in just 18 months.
With the grant covering the majority of the costs, the BPU loan needed to cover up-front costs of approximately $1 million for Saint Peter's. The loan's terms were generous, with three years of payments out via the hospital's energy bills. So as long as the project reached savings equal to its initial costs within the nine years, then the hospital wouldn't need to outlay any up-front capital and would see positive cash flow by the ninth year if not sooner.
At Saint Peter's, the loan repayment took just three years, explain Mulcahy and Stoldt. "We had a million dollars of costs spread over three years, and we had over a million dollar of savings in the first year, so it was positive cash flow for us practically out of the gate," says Stoldt. "With both of these energy saving mechanisms in place, we're actively practicing cost avoidance."
Power-save = powerful savings
Moving toward energy efficiency doesn't require expansive or expensive projects; indeed, simple solutions can bring significant savings. Boston-based Partners HealthCare implemented a personal computer power-management plan that's saving the organization $1.5 million annually, says Manuela Stoyanov, corporate manager of client infrastructure design for Partners. With an expansive network including eight hospitals, more than 5,000 practicing physicians, and 170,000 admissions annually, Partners uses more than 30,000 PCs in its power-save program.
With that many pieces of equipment of varying age and energy efficiency levels, Partners HealthCare needed to find a way to ensure that PCs were turned on only when in use, but finding the right software wasn't simple. It took Stoyanov and an intern a year of research to find a software program that would suit its needs, six months to install and test it, and then years to do an organizationwide phased roll out. In place for the past six years, the initiative is continuing to produce millions of dollars in energy savings.
Partners' power-save project started as an effort to address a problem the organization was having with power-save settings on its laptops. Stoyanov explains that while researching and testing solutions for its laptops, the organization decided to do an enterprisewide energy analysis of its desktops and laptops. As each hospital in the network had its own utility manager, centralizing and sifting through data was assigned to their intern.
"It was difficult to get the data together. Finding out who had the data was the first part of the process; then we needed to collect the correct electricity usage data from everyone, and then extract the specific information associated with the computers," says Stoyanov. Once they had the numbers, Stoyanov needed to estimate the potential financial savings for pursuing this project. "That was hard to do because some of the monitors were bulky and old and others were new and more energy efficient. We decided that until we found a power-save solution, we couldn't get at a real number of what the savings per PC and per monitor would be."
The biggest challenge in the project became finding software that would work with the hospital network's unique needs, she says. A free power-save program it had initially tested didn't offer enough flexibility; it needed to allow IT to dictate which pieces of equipment would go into power-save mode and when.
"In clinical areas we needed the computers on 24/7, but in the offices where they leave at night we wanted those in stand-by mode. But we also needed the computers to come on for routine maintenance operations during the nights or on weekends and then go back to sleep. The freeware and other programs we researched didn't allow us to categorize our computers this way."
The solution Partners landed on was Verdiem Surveyor, a product that cost them less to purchase than the first year of savings from installing it, Stoyanov notes. To test it, Stoyanov and a small team established a pilot in the main IT hub using 20 computers. NStar, the local utility company, caught wind of Partners' power-save pilot program and also wanted to see the kind of results the organization would have.
"NStar got in touch with us to see if we were really saving power," says Stoyanov. "They came in and put a wattmeter on each of the 20 computers used in the pilot. So NStar was observing and recording these computers' power usage every morning. It turned out to be a successful experiment because NStar confirmed our energy saving data."
By NStar's calculations, the changes the organization made saved $50-$60 per PC per year in electricity: When installed on the majority of the 30,000 units at Partners that translates into over $1.5 million in savings. Additionally, the organization's energy savings earned it a $200,000 energy rebate from NStar.
"The savings and the rebate more than paid for the software," Stoyanov says. "At the very beginning we didn't know how much we'd save—we just couldn't calculate it. Once we got the data from NStar we knew the more computers and devices we could get onto the program the larger our savings would be, and that made selling the project to leadership easy."
With only so many capital dollars available to pursue an organization's objectives, often clinical projects take precedence over operational ones, and researching and investing in energy conservation may get pushed to the back burner. However, the hospitals and health systems that do opt to make energy-saving upgrades, be it through capital budget allocations, philanthropic donations, grants, or loans, are finding there's an environmental and financial return that make these efforts a smart decision.
Reprint HLR0213-8
This article appears in the January/February 2013 issue of HealthLeaders magazine.
In our annual HealthLeaders 20, we profile individuals who are changing healthcare for the better. Some are longtime industry fixtures; others would clearly be considered outsiders. Some are revered; others would not win many popularity contests. All of them are playing a crucial role in making the healthcare industry better. This is the story of Patrick McGuire, CPA.
This profile was published in the December, 2012 issue of HealthLeaders magazine.
"There was this lingering mistrust with the physicians so we came to the conclusion we had to burn down our old way of doing things and start anew."
Patrick McGuire, CPA, the senior vice president and CFO at St. John Providence Health System in Warren, Mich., is not your average finance leader. Like many of his peers, he's played a pivotal role in his system's financial transformation, but it's his innovative approach to physician partnership that sets him and his organization apart.
"I feel like my greatest achievement has been maintaining the financial wellness of the organization in one of the toughest markets in the country," says McGuire. Indeed, two of Michigan's three largest employers declared bankruptcy during the recent recession, which caused an economic cascade that bankrupted numerous other state businesses and spurred massive layoffs. McGuire watched as his community's economic crisis led to a growth in the system's uninsured population, testing the organization's ability to creatively reduce costs.
"We had to do what we could to keep our costs in line, but we also had to keep our focus on our mission. We didn't stop caring for the uninsured as they came into our ER. We needed to try to be a vibrant beacon for our community during a very challenging time," he says.
Since joining St. John Providence Health System in 1986, McGuire has helped his system through numerous ups and downs. He's worked to grow the system from a single hospital to seven, helped diversify the enterprise across five counties in southeast Michigan, and saw the organization become the largest single component of Ascension Health, which is the nation's largest Catholic and nonprofit health system, and the third-largest system (based on revenues) in the United States.
McGuire has provided strong financial leadership for the $2 billion health system and stood as a unifying voice for Ascension Health Michigan Ministries when it negotiated a five-year agreement with Blue Cross of Michigan. Unquestionably McGuire is a seasoned healthcare finance veteran, but for all his experience McGuire believes no one can afford to stop chasing innovation.
In 2010, McGuire found himself in unfamiliar territory as the system planned to move into delivering coordinated care to patient populations, and to do that it would need to forge stronger physician relationships. Nationally, some organizations had begun establishing comanagement agreements to meet those ends, but McGuire felt that that approach only partially exemplified the unified approach of St. John Providence.
"We had long standing relationships with our physicians going back to an early 1990s PHO … but we got to 2010 and looked at our alignment with physicians and we realized our physicians didn't view the partnership as much of a partnership, at least not as much as we did," he says. "From an administrative standpoint we believed we had trust and engagement and that we were looking out for the best interest of our physicians, but it became apparent that some physicians didn't see it that way."
Though disheartened by the realization that the organization and it physicians weren't aligned, McGuire and the leadership team became invigorated by the idea of creating something new—a truly equal partnership between the system and the physicians.
"The future of healthcare will require us to significantly partner with the physicians to be successful," says McGuire. "We wanted to move forward on path of mutual alignment where it wasn't us versus them. But there was this lingering mistrust with the physicians so we came to the conclusion we had to burn down our old way of doing things and start anew."
However before an equal partnership could be solidified, the six separate physician groups had to unify and have one voice at the table. The process took nearly a year but in January of 2011, the six St. John Providence-affiliated physicians' organizations became one—The Physician Alliance.
The newly created physicians' organization, consisting of more than 2,300 Michigan doctors, announced a progressive mission: "The organization will assure a more synergistic partnership with St. John Providence Health System and its hospitals, including evolution toward an accountable care organization while maximizing pay-for-performance income for our physicians. The key focus will remain on educating providers around clinical excellence and newly evolving market trends as well as development of strategic contracting opportunities, including risk contracting when appropriate."
In May 2011, The Physician Alliance created an equal partnership with St. John Providence Health System to become SJP Partners in Care. The partnership also required a significant investment to The Physician Alliance by St. John Providence for IT (including an EMR, health information exchange, and patient portal) and other infrastructure changes to encourage better communication and management of care.
SJP PIC created three boards to provide leadership for the organization's activities, including physician services and support, utilization and quality improvement, and finance and contracting.
"We felt the foundational principle of this partnership should be that everything is 50/50 to the extent possible, so we have two co-chairs of the organization—our CEO Dr. Patricia Maryland and the Physician's Alliance vice chairperson Dr. Daniel Megler—and for all boards," explains McGuire. "We've always felt we worked in partnership but to really demonstrate that and to work closely with The Physician Alliance on these committees ensures transparent and candid discussion about all of our issues."
With SJP PIC in place, the organization has begun moving swiftly toward growing its population health offering, expanding its patient-centered medical model dubbed the PCMH Neighborhood and developing an accountable care organization. "We can't predict with precision what the future will look like but we know we need to change based on what we do as an industry and what the federal government does. So when you're shaping a future without knowing what to expect, you need core principles to believe in and this partnership fits those. We all know, and our payers have told us, this is a very unique arrangement," says McGuire.
"I want the physicians to be the most successful in our market and they want us to be successful. And if I'm not building something to make them successful from a clinical and patient satisfaction standpoint, then I'm not building anything with staying power. If you start with the premise that you're really equal partners you'll have a successful recipe for the future," he concludes.
This article appears in the December 2012 issue of HealthLeaders magazine.
The coming year portends to be financially uncertain for hospitals and health systems and represents the foundational linchpin for meeting 2014 deadlines for mandates such as health insurance exchanges and ICD-10. Chief financial officers will be juggling more initiatives than ever before. Last year, when we asked several financial leaders for their predictions for healthcare in 2012, the common response was an expectation that organizations would have to continue to slog uphill through national economic strife and unsteady state reimbursements and patient volume declines.
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The picture remains equally intense for CFOs in 2013. Financial leaders must contend with the same the challenges from 2012 while ramping up to meet more deadlines. As healthcare organizations put the 2013 strategic plans into action, four hospital CFOs offer their insights and forecasts.
Mark Bogen
Senior Vice President and CFO
South Nassau Communities Hospital
Oceanside, N.Y.
Total number of licensed beds: 435
What are the key areas you'll be watching in 2013?
Forecast challenges. There's no question we're under attack from the federal and state governments as well as the commercial payers; with denials management, we're having to justify every single case—big or small—that gets admitted to the hospital. The amount of resources and time it takes is staggering. Even if we're successful, the delays in the cash flow and the situation with Medicare hurts us. From a resource and cash flow standpoint it also makes our ability to determine what our revenue will be challenging; it makes budgeting for 2013 that much more difficult. If you couple that with some of the healthcare reform deadlines coming up and the volume changes from inpatient to outpatient … and the federal budget issues with sequestration, then 2013 is going to be the single most challenging year for budgeting. I've never seen it as much of a moving target.
The quality agenda. We need to make whatever investment is needed to get our quality scores to where they need to be and wherever is appropriate as that has an impact on value-based reimbursements as well as public perception and physician and clinician recruitment. Still, we're limited in our ability to fund every initiative ... so as we budget for 2013 we have to balance the quality agenda against affordability and we must set clear measurements and use benchmarks and ensure we're getting the outcomes from those investments.
Technology investment. We went live with our computerized physician order entry system in June and we're trying to get our Stage 1 Meaningful Use dollars. In the past few years we've made critical investments in IT and in our EMR, but every day it seems we're on virgin territory. Just when we think we've got all the technology and people in place, we find that something else significant needs to be added. Our EMR is still only partially done and our ambulatory component is being pushed back as well as clinical documentation until we see our EMR up and running. So IT is a day-to-day expense and we keep making the investment in the hopes the returns present themselves.
Which strategic undertakings from 2012 do you feel could greatly influence the organization in 2013?
Maintaining independence. It's continuing to have the ability to operate as a community hospital long-term. We have a partnership with Winthrop South Nassau University Health System, but for the most part we've spent the past 16 years working substantially as an independent hospital with some convergent strategies. We've been talking about getting together in a more meaningful way and looking at enacting strategies on a larger scale. But when you have strategies that are for your organization as a standalone facility and then divergent strategies, it can make the organization feel disjointed.
Denials management. Also, for our denials management we hired a consultant to add to our overall case management program. We started it in August by looking at Medicare and Medicaid and we're hoping to move it into managed care. We've put a lot of emphasis on this program because for the first time ever our retrospective denials surpassed 1% of our operating revenue and cost us $5 million in lost revenue. Revenue is difficult to come by these days, so this is an area I'm wedded to seeing successful this year.
Healthcare reform is driving a lot of changes in the model of care; how are these changes influencing your physician recruitment effort or compensation structures for 2013?
Like many smaller hospitals we built physician compensation plans that are salary plus bonus, and the bonus was usually based on collections. Over the past couple of years we've moved to RVU-based compensation and our new community practices are part of those deals. But what gets difficult is most doctors are already feeling pinched financially or have lost dollars from their historic compensation.
Those who are looking to be employed are looking for income guarantees at current or historic levels, and that may be greater than the amount the office is producing. The RVU model has only been in place the past two to three years, and we're at least comfortable with it and understand it, plus we have the ability to capture the data and measure it. So for us in the short-term we'll stay with RVU-based comp, but we'll need to work on how it will fit with bundled payments or sharing jointly of revenue ... Understanding what compensation model to adopt that fits the new system of care is something were still behind on.
Steve Frantz
United Division CFO
LifePoint Hospitals Brentwood, Tenn.
Number of beds and hospitals: Over 6,000 and 56
LifePoint is a publicly-traded, for-profit company.
What are the key areas you'll be watching in 2013?
Reimbursement pressures. All hospitals are faced with reimbursement pressures and payment reforms impacting Medicare and Medicaid reimbursement. These pressures have led us to explore ways that we can operate more efficiently and enhance our ability to focus our resources on the delivery of high-quality patient care. For example, LifePoint has adopted a shared services approach for certain nonclinical business functions.
Physician collaboration and integration. We are looking for more effective ways to engage our primary care base and significantly improve how we interact with this group of physicians. Creating a service line approach and bringing these physicians to the table is very necessary to support our mutual success. Also, as more of these physicians operate in an "outpatient only" environment, we must find ways to keep them engaged with the hospital and our hospitalist programs. Be it through employment relationships or some other means, supporting our primary care physician base will be increasingly important moving forward.
LifePoint HEN. We are very proud to be one of 26 organizations across the country—and the only for-profit organization—chosen by the Department of Health and Human Services to serve as a Hospital Engagement Network in its patient safety initiative. The HEN will continue to enhance our focus on quality and patient safety and bring key stakeholders to the table around quality initiatives.
New acquisitions and performance of recent acquisitions. We have an aggressive but disciplined strategy to grow through acquisitions, adding new hospitals to our company's footprint and new services within existing markets. We expect this strategy to have a significant positive impact on financial performance.
Which strategic undertakings from 2012 do you feel could greatly influence the organization in 2013?
Clinical documentation improvement, as one method of further enhancing patient safety and quality of care, is a key strategy for 2013. In addition, as our healthcare system moves closer to universal adoption of EMR, better documentation will allow patients and all caregivers greater transparency into existing conditions and previous or ongoing treatments. This should allow patients to become better educated about their health and more engaged in their treatments.
Healthcare reform is driving a lot of changes in the model of care; how are these changes influencing your physician recruitment effort or compensation structures for 2013?
We expect to employ a higher percentage of primary care physicians in our markets in 2013. Employment of physicians is an important strategy to direct care back to our facilities and specialists who support our local facilities. This strategy should allow more patients to receive care close to home and also promote standardization and coordination of care in our communities.
Nick Vitale
Executive Vice President and CFO
Beaumont Health System
Royal Oaks, Mich.
Number of beds: 1,714
What are the key areas you'll be watching in 2013?
Preparing for healthcare reform. Near the top of my list is preparing for healthcare reform and actually figuring out what healthcare reform will mean, postelection, to the healthcare community in terms of payments and our relationships with physicians.
Mergers and acquisitions. We'll be watching to see what the elections mean in terms of consolidation and contraction to the healthcare industry. Our area is over-bedded and we expect to see more consolidation and contraction, especially as we see more reimbursement changes.
Clinical integration strategy. Beaumont predominantly uses a private practice model but we do have a high number of employed physicians, and we're employing more primary care physicians. We're looking to work more closely with our private doctors on clinical integration. We'll be working with the Federal Trade Commission to get our partnerships recognized as clinical integration entities and look to our managed care to help us efficiently manage. We are finding more physicians want to be employed and provided with back-office services. We're building a toolbox solution to work with our doctors to help them address their needs.
Which strategic undertakings from 2012 do you feel could greatly influence the organization in 2013?
Physician alignment and integration. Clinical integration is challenging. We've been working with two nonhospital-employed but hospital-affiliated physician organizations to bring these organizations together and improve their relationship. But we're also looking at physician alignment in terms of cost control and transitions of care. We want groups to try different things to reduce readmission rates. We also want to work with our physicians and groups on population management. We believe payers, in the future, won't be interested in paying by episode but will want to pay by population, and they'll reward systems that can demonstrate more value and quality.
Managing change. I've been doing this for 32 years; there's always new and challenging stuff on the horizon, but it always seems like through hard work and a lot of research and analysis we've always figured out a way to address the issues and move forward in a positive way. I know there's a lot of handwringing about healthcare reform … but healthcare as an industry isn't going anywhere.
Healthcare reform is driving a lot of changes in the model of care; how are these changes influencing your physician recruitment effort or compensation structures for 2013?
We have changed how we compensate our physicians, starting back in 2009, but it has taken two years to get it fully implemented. It's structured around clinical, administrative, research, teaching, and strategic components and is mission-based compensation. For instance, the clinical component uses RVUs for metrics while our administrative component uses time value units.
It took a while to get the physicians to understand and buy into the new model, but it seems to be working well. For our private doctors we're looking at quality metrics and working with them to maintain quality, which will help them to do better financially with the payers.
Also, we've established an affiliation with a medical school—the Oakland University William Beaumont School of Medicine—and we had our first class of 50 students in 2012, but we had over 3,200 applicants. This year we have 75 students from a pool of 3,700 applicants. We are proud of the fact that the accreditation body came in and found no areas to issue citations. We think our affiliation will help us with recruiting physicians eventually.
Marlene Weatherwax
CPA, vice president and CFO
Columbus (Ind.) Regional Hospital
Total licensed beds: 325
Editor's note: Marlene Weatherwax also offered her 2012 outlook last year. We asked her to tell us how this year panned out and how it compares to what she anticipates will happen in 2013.
What are the key areas you'll be watching in 2013?
Technology. This was on the top of my list last year and it is again. We implemented our new IT system in 2012 and we've now got a good start on meeting meaningful use and we're going to continue on a path to get to the highest level of meaningful use and get the incentive funds. For the most part that's going to be a positive, although implementing it has introduced a lot of change and that can be painful.
Healthcare reform. It's hard telling exactly what will really happen, but like most hospitals we're trying to come to terms with what we believe will help fix healthcare no matter what the federal government does to try to change the model of care. It's an impetus to get on with the work to change the model of care through better physician alignment and to realign incentives that work with the patient-centered medical home and to keep overutilization down and reduce unnecessary utilization.
ICD-10. It's getting closer, assuming they don't move the deadline again, and we need to start working toward that or it could really have more of an impact on us than we realize. I think trying to understand the outcomes reporting is going to be a challenge; it might have a negative impact on us before we realize the benefits. Last year I put value-based purchasing on my top-three list, but this year I'm not sure it's among them. We've got a lot of other areas to concentrate on.
Which strategic undertakings from 2012 do you feel could greatly influence the organization in 2013?
Without question it's the 2012 changeover in our IT and the implementation of an EHR and computerized physician order entry. We did a "big bang" approach and replaced 40 systems; we had some disappointments but we're gaining ground and it will be interesting to see where we go with it.
In 2013 we've got some upgrades to do and some more modules to add and we have to implement the full version of our EHR for our physicians, but we're done on the nursing documentation side.
The other area we are working on is physician alignment. We have to decide whether we're going to have clinical integration with a formal FTC opinion or do some sort of ACO or risk-based contracting, and that will go well beyond 2013. But next year I think the direction we'll head will gel for us.
Healthcare reform is driving a lot of changes in the model of care; how are these changes influencing your physician recruitment effort or compensation structures for 2013?
The whole clinical integration and risk-based contracting comes with the value proposition of figuring out how we reward the physicians for driving improvements. We've been looking at a few models and in 2013 we'll work those in as part of other care initiatives. The one compensation model we're looking at is more of a scorecard approach, and the funds are coming from gainsharing. So if we're able to drive costs down for payers and employers, it would create an incentive pool that could then be redistributed based on scorecards. We think our new IT system will help us get access to the data we'd need to do that successfully.
Reprint HLR1212-8
This article appears in the December 2012 issue of HealthLeaders magazine.
This article appears in the December 2012 issue of HealthLeaders magazine.
In September 2012, HealthLeaders Media held its second annual CFO Exchange, bringing together 30 finance leaders from hospitals and health systems nationwide. The gathering in Kiawah Island, S.C., served as a unique opportunity for finance leaders to discuss with peers how their organizations are tackling some of the more demanding healthcare mandates in history while maintaining a grip on the purse strings.
Topping the agenda for these CFOs were discussions of how to:
Identify and reduce true costs
Develop strategies related to the financial shift from fee-for-service to population health
Capture financial data and use it to impact business analytics and processes
Optimize the revenue cycle
Recognize and respond to the impact of accountable care organizations on clinical and business integration
In this piece, we highlight event discussions in which nine CFOs take a deeper look at how they are assigning costs and driving them out at their respective organizations. Top of mind for these leaders is where they are turning to uncover costs and what to do about reducing them, and many feel the challenges are substantial. CFOs note they are grappling with declining Medicare reimbursements, value-based purchasing penalties, and a shift in inpatient volumes, while continuing to fund huge technology initiatives and expansion through physician acquisition or employment.
Healthcare reform is influencing everything from the hospital cost accounting systems to decision support and how physicians are compensated. CFOs are mindful that while getting at their true costs may be the only path that helps uncover the deep budgetary cuts needed for their respective organizations’ long-term survival, it is a complex and elusive undertaking.
Though consumer-directed healthcare is driving patients to become more participatory and decisive healthcare consumers, healthcare organizations are not much closer to knowing the actual cost of care. Healthcare organization boards of directors and executive leaders are now equally interested in having a more accurate picture of how much everything costs, and they’re calling on financial leaders to explain how costs are assigned for everything from pens to procedures. Our CFO panelists indicate they still haven’t mastered the nuances of this renewed pursuit of cost assignment and reduction, and they wonder how it will be influenced by bundled payments and population health.
Until these new models of care begin to bear financial fruit, many CFOs are taking a fresh look at all their expenses and adapting old approaches to reduce costs. They are looking at administrative centralization, repurposing real estate to optimize beds, growing market share through physician employment or acquisitions, developing alliances to bring about greater economies scale, physician preference and utilization, as well as all labor opportunities. Only time will tell if these efforts will drive out the 20% of costs most need in order to endure the healthcare transition from volume to value.
Robert S. Shapiro
Senior Vice President and CFO
North Shore–Long Is land Jewish Health System Great Neck, N.Y.
"[When it comes to true cost] honestly, you can't get to any—there is no end zone. You just keep sorting the data and going through your biggest problems. And the interesting part is, as you're fixing one, there's a problem going on that you may not realize yet."
Michael Burke
Senior Vice President and Vice Dean, Corporate CFO
NYU Langone Medical Center
New York City
"Our volumes have shifted, so we're definitely looking at space costs and allocation. We're in a growth mode as we're providing more care in ambulatory settings. Previously you might have inpatient facilities running at 65% or 70% occupancy, but now we're providing more care in ambulatory facilities. On the inpatient side, we are renovating and reconfiguring our space to provide private room–focused care as opposed to semi-private rooms."
Roland L. Thacker, MBA, FHFMA
Senior Vice President, Treasurer, and CFO
Columbus Regional Healthcare System, Inc.
Columbus, Ga.
"The term directional is a very good term that we use that all the time to describe this [effort to get at true cost]. When we pushed our data out to our physicians about five or six years ago, we had to be very careful because they'd pick it apart and find all the errors—especially when you're driving down to the doctor-level within a service line. We are careful to say, 'This cost data is directional, and our goals here are to have incremental improvements over the current numbers.' And we use ratios for doctors against their peers and then we say, ‘We want you to just get better.' But this doesn't mean that's the exact number they have to hit, but we want it to move in the right direction."
Benjamin R. Carter, CPA, FHFMA
Senior Vice president and Chief Financial Officer
Trinity Health
Novi, Mich.
"Costs change over time, so the cost accounting system is only good as the assumptions that go into it. Cost accounting systems have to be maintained constantly, and there is still an art to it, although some executives think these costs are absolute numbers."
Rick Hinds, CPA
Executive Vice President and CFO
UC Health
Cincinnati, Ohio
"We continue to squeeze everything you can out of today's cost structure, but then we've got to really step back and redesign the way we deliver healthcare to take out large amounts of costs."
Mike O'Malley
Associate CFO
Denver Health and Hospital Authority
Denver
"We're in the middle of an extensive workforce management initiative to look at all aspects of labor costs. We brought in a consultant to help us understand more about our hours per patient day, but even further than that, just simply [whether we are] following our own internal policies in terms of PTO [paid time off], no lunch breaks, clocking in at an assigned location. If we knock those costs out, it's amazing the amount of money it translates to."
Jeffrey D. Limbocker, FHFMA, MBA
CFO
Our Lady of the Lake Hospital
Baton Rouge, La.
"I'll call it a sort of the cost of doing business in this era of healthcare right now. We just installed EPIC on the outpatient ambulatory side, and I can see it's going to take a few years, but I can see some real benefits. It may hurt some areas a bit in the meantime in terms of productivity but the benefits to the patient, the revenue cycle, and care management should drive out costs."
Aaron Coley
Vice President of Decision Support
MemorialCare Health System
Long Beach, Calif.
"Our biggest success has been on the labor side, driving out variability and managing it daily versus biweekly or monthly. We've taken benchmark data and pushed it down [to the clinical staff] over the past three or four years, and now we're seeing some significant savings. It's tough; we have mandated nurse ratios and it limits some of the creativity."
Reprint HLR1212-11
This article appears in the December 2012 issue of HealthLeaders magazine.
I spend the majority of my time talking to the nation's top healthcare financial leaders, reading the latest healthcare research and pulling it all together in articles and webcasts.
Doing so has given me a great education on this industry, and at the end of the year I like to reflect on what I've learned and which organizations' approaches made lasting impressions on me. So, here are my top three takeaways from 2012: I hope you find them useful as you move into the new year.
1.Healthcare is entering arenaissance. From a financial standpoint, 2012 and 2013 may feel more like Armageddon, but healthcare is really preparing for its rebirth. This offers many positives for patient care, such as better quality and a more patient-centered approach.
Nevertheless as with most reinventions, challenges are to be expected. I've noticed that the hospitals that are best positioned to thrive in the value-based care future haven't gotten through this limbo-like period quickly.
Most of what the "new" healthcare is about is actually old healthcare in need of retooling in order to serve greater numbers of people. Accountable Care Organizations and population health management aren't new, but if implemented now, an organization can tweak its approach to help reduce costs before the payment model shifts away from fee-for-service.
Unfortunately, until the payment model completes its transition in 2014, CFOs should anticipate financial losses. But there is money to be earned in the future by establishing a model now—that's a take-away from Kevin Vermeer, executive vice president and CFO at Iowa Health System.
"We fully expect that our revenue is going to go down," he explained at the 2012 American Medical Group Association annual conference in San Diego last March. Iowa Health System, an integrated 26-hospital system headquartered in Des Moines, has taken the population health leap already by expanding its existing ACO.
It is using a variety of methods to sustain that decision financially, including developing Iowa's first commercial ACO with Wellmark Blue Cross and Blue Shield of Iowa. It has also agreed to create ACO organizations in four other markets across the state and two Iowa Health affiliates operate a Centers for Medicare and Medicaid Services Pioneer ACO.
Any effort to move forward, however, begins by getting data. Organizations will need quality and patient satisfaction metrics to help construct bundled payment agreements with payers. Moreover, healthcare organization must also figure out how to calculate physician pay for spending more time with patients on preventative care. Well, I said this transition would be challenging.
2.Don't make quick cuts; make strategic, sustainable cuts. Beaumont Health System president and CEO Gene Michalski understands sustainable cost reduction, that point was clear to me when I interviewed him this year.
"We've had a long history of pruning the tree, but about every three years or so cost creep occurs, so getting perpetual cost-saving involved pruning the tree frequently," he said. Michalski wasn't interested in making the same cuts repeatedly. He decided it was time to change BHS's approach.
"For us that [pruning process] evolved into share-of-saving and value management," said Michalski. To solve the problem, BHS undertook a patient-focused process improvement effort across its three, south Michigan hospitals.
Doing so led BHS to reduce and maintain an average patient care cost reduction of 11% over four years from 2007 to 2010, according to Hospital Compare data.
Achieving this magnitude of savings wasn't the hard part. The hard part was structuring changes in a sustainable way, according to Michalski. Sustainable cost reduction requires organizations to shed the reactive, tactical approach that has been the norm for years, and instead make deliberate, strategic changes that permanently reduce costs.
3. Consolidation isn't the only answer. In healthcare today, growth isn't just about market share and margin; it's about developing an integrated network that can provide coordinated care to ultimately reduce healthcare costs.
To arrive at that end, financial leaders must calculate the path to growth: physician employment, joint venture, or merger/acquisition. A blend of all of these is what many organizations are using, but structuring contracts that foster alignment between parties is often the neglected ingredient. That can turn a service line gap solution into a big problem.
I've written extensively about hospital-physician alignment and one organization's approach stands out: Health Quest, a three-hospital system in Lagrangeville, NY. It designed compensation and incentive structures that focus on quality to drive alignment.
Other organizations are also doing this, but what makes Health Quest's approach unique is that it has worked with its physicians to determine the metrics used to measure quality.
Moreover, Health Quest created a management team consisting of a physician and administrator to run its service lines. Physician bonuses are based 70% on quality and 30% on patient satisfaction for five agreed-upon metrics. The percentage of bonus paid to each physician is based on whether the participant reaches a baseline goal, a target goal, or a stretch goal.
"We see the benefit as really getting the doctors involved now in the development of [quality] metrics [to track]. Ultimately that's really going to be better for the patient and better for our quality," explained David Ping, Health Quest's senior vice president of strategic planning and business development.
In early 2012, HealthLeaders released a mergers and acquisitions report which noted that nearly 80% of healthcare leaders intended to have M&A deals under way or would be exploring deals within 12-18 months.
It isn't enough to know that a service line gap must be filled. Organizations need to fill the gap while strengthening the organization's position overall. Take a page from the Health Quest notebook and prepare your agreements with organizational goals and alignment in mind and get your physicians in on the process.
Next year is going to be a challenging one for everyone in healthcare, with more than a few new tasks to tackle. Unfortunately, no healthcare or governmental organization has figured out the formula that will work at all hospitals to help deliver patients better care at lower costs.
Nevertheless, by following the lead of some of healthcare's frontrunners, other providers may be better prepared for what lay ahead.
This article appears in the November 2012 issue of HealthLeaders magazine.
Across the C-suite, salaries and total cash compensation continue to rise, though changes to incentive structures may be influencing the size of the increase.
INTEGRATED Healthcare Strategies' 2012 National Healthcare Leadership Compensation Survey reports that though the use of annual incentives for executives remains very common, with approximately 80% of all hospitals and systems providing this type of plan for executives, the use of long-term incentives is slowly increasing, explains Kevin Talbot, executive vice president and practice leader at Integrated Healthcare Strategies.
He notes that an IHS study indicates from 2001 to 2011 hospitals and health systems began slowly adding more long-term incentives into the executive compensation model. IHS' data also indicates the most common performance category for annual incentives remains financial (generally, operating margin) though clinical quality and patient satisfaction are also in the incentive mix.
For not-for-profit CEOs nationwide the median total cash compensation (base plus incentives) increased 3% to 6.7% over last year, and these organizations' senior leadership teams gained similar pay increases, according to IHS' survey and the Sullivan, Cotter and Associates, Inc. report, 2012 Survey of Manager and Executive Compensation in Hospitals and Health Systems.
Health system CEOs' median base salaries increased to $717,500 (2012) from $650,000 (2011), while independent hospital CEOs' median base salaries rose to $506,100 from $472,000 during that period, according to IHS. Comparatively, Sullivan, Cotter and Associates shows the base pay for system CEOs nationwide increased while the TCC declined slightly—base pay increased to $334,700 from $325,000, while TCC decreased to $411,100 from $412,100 from 2012 to 2011, respectively. Unlike their health system counterparts, independent hospital CEOs' base pay and TCC climbed between 2011 and 2012—base pay went up to $530,000 from $504,000 (a 4.9% gain) and TCC jumped 4.3% to $600,000 from $574,000.
Nationally, CEO compensation has risen year over year, though there are variations in pay for CEOs at health systems versus independent facilities. CEOs at not-for-profit integrated health systems received a median 4% increase in base salary from 2010 to 2011, while independent hospital CEOs saw a salary improvement of 5%, according to the 2011 Hay Group Compensation Survey.
Other members of the C-suite, too, are seeing increases, but the percentages vary by position. COOs at systems saw a modest 1.6% increase in base pay in 2012, but actually had a TCC decrease of -1.7%, cutting their overall salary and incentive pay to $249,100 (2012) from $253,300 (2011), the Sullivan, Cotter and Associates survey notes. However, the same survey notes that COOs at independent facilities got a 9.2% TCC boost to $375,900 (2012) from $341,200 (2011). Nationally, system CIOs received one of the largest TCC increases year over year, according to Sullivan, Cotter and Associates (5.8%). IHS reported a median base salary increase of (3.5%). In 2012, independent hospital CIOs' median base pay hit $217,100 (previously $205,000) while systems CIOs reached a base pay of $291,700 ($273,500 in 2011), according to IHS; Sullivan, Cotter and Associates tracked a 7.9% increase in TCC for all CIOs nationally reaching $254,300 (2012), up from $234,300 (2011).
Sullivan, Cotter and Associates reports healthcare system CFOs earned a median base pay of $205,000 (2012), up from $200,000 (2011). Their TCC increased 2.1% to $238,300 from $233,300 in that same period. Freestanding hospital CFOs had a 6% uptick in TCC reaching $340,000 (2012), up from $319,700 (2011).
Though nationally hospitals are focusing more on quality initiatives that require even greater clinician attention, CMOs received average salary increases in both surveys. IHS reports CMOs at systems had a base pay increase of just 2% while CMOs at freestanding hospitals had a slightly higher increase of 2.4%. Sullivan, Cotter and Associates' data shows a TCC increase of just 0.3% for CMOs at systems, while independent hospitals gave CMOs a 3% boost.
This article appears in the November 2012 issue of HealthLeaders magazine.
In our annual HealthLeaders 20, we profile individuals who are changing healthcare for the better. Some are longtime industry fixtures; others would clearly be considered outsiders. Some are revered; others would not win many popularity contests. All of them are playing a crucial role in making the healthcare industry better. This is the story of Ginny Ehrlich, MPH, D.Ed.
This profile was published in the December, 2012 issue of HealthLeaders magazine.
"Changing childhood obesity is both cultural and systemic. We learn our eating habits from our families and our community. Schools and communities help reinforce those behaviors."
In the pursuit of reducing the cost of healthcare there's a great deal of attention paid to chronic disease, but much of that focus centers on diseases in adulthood. But in the past 20 years childhood obesity has also nearly doubled, according to National Center for Health Statistics, Centers for Disease Control and Prevention, and it has been linked to costly chronic care diseases including adult obesity and diabetes and an increased risk of heart failures and asthma. To help address chronic disease in its later stages, many believe it must be tackled when people are young. And, childhood obesity is preventable if you can connect with the children and teach them good habits early. That's what Ginny Ehrlich, MPH, D.Ed, CEO of the Alliance for a Healthier Generation is doing by taking her organization's programs to the schools and beyond.
"Changing childhood obesity is both cultural and systemic," says Ehrlich. "We learn our eating habits from our families and our community. Schools and communities help reinforce those behaviors."
Ehrlich joined the Alliance in 2006 and has been working to increase children's access to healthy foods and physical activity at schools and communities nationwide. The Alliance was founded by the American Heart Association and the William J. Clinton Foundation and has been led by Ehrlich since 2008. The Healthy Schools Program, one of several initiatives the organization supports, includes more than 15,000 schools across the United States and offers expert advice and resources for school professionals, teachers, students, and parents to encourage healthy eating and exercise.
Ehrlich says a big challenge the Alliances had faced was getting onto the priority list of school administrators, who already have an abundance of demands.
"Administrators have primary accountability to reach state and national levels for education," Ehrlich says and do not focus so much on offering healthier meals and implementing wellness programs—"though we know that these things can influence educational outcomes. So we navigated the systemic barriers by working within the school system educational structure to make it easy to do our program. Our Healthy Schools Program mirrors the training and processes schools are already using so we can put our program seamlessly into place."
What makes HSP unique is has developed evidence-based training and technical assistance for schools to make its school-based obesity prevention program sustainable. That requires the recruitment of HSP managers—individuals already working at the schools—to drive the program and submit action plans.
"We found another barrier to these initiatives succeeding is they become too reliant on the formal leadership, like a principal or superintendent. So instead we try to build a champion with delegated authority of those leaders to cultivate the program," says Ehrlich. Relationship managers undergo preliminary and continual training, which is provided via telephone, webinar, email, and in-school visits.
The program calls for HSP managers to:
form a school wellness council
complete an HSP inventory (an assessment of foods at the school and student weight and fitness)
generate a priority list and action plan
cultivate technical resources
implement support program
monitor progress
"We've seen tremendous success with our Healthy Schools Program. It's now considered an evidence-based approach and is being used to change policies in the school systems nationwide. In March the CDC talked about the efficacy of our model in preventing chronic disease," says Ehrlich. "Eighty percent of schools in this program are making measurable changes, like adding more fruits and vegetables to school breakfast and lunch menus and eliminating sugar beverages in vending machines."
In addition to working with the schools to raise awareness with the children about healthy eating, the Alliance has worked to eliminate barriers not only inside the schools but also outside.
The organization created a landmark agreement with the American Beverage Association that contributed to a 90% reduction in calories in the beverages shipped to schools since 2004, according to the American Journal of Public Health. The agreement calls for the ABA to remove the majority of full-calorie soft drinks. Now drinks available to students at school vending machines and cafeterias are nutritious, sized proportionate to age, and are low or no calorie.
To make it easier for the school cafeterias to get affordable healthy food options, the Alliance has also worked with group purchasing organizations and collaborated with a technology firm to create a free online tool to streamline the healthy food procurement process for schools.
Additional achievements include:
Building a coalition of major health insurers, employers, and national medical associations to provide more than 2.6 million children with access to at least four follow up visits with their primary care provider and at least four follow up visits with a registered dietitian each year as a part of their regular health insurance benefits.
Fully 80% of participating schools have made measurable progress in creating a healthier school environment.
More than half of the participating schools improved the nutritional values of their school meals.
More than half have dedicated at least 20% of their after-school program time to physical activity.
The Alliance's efforts don't stop at HSP; Ehrlich says it wanted to create a comprehensive program that reached kids in as many ways as possible. So the organization reached out after-school programs to bring national healthy eating and physical activity standards to communities around the country.
The Alliance also partnered with the American Academy of Pediatrics to use the best-selling children's book, The Very Hungry Caterpillar by Eric Carle, to teach families about healthy eating habits at home. Over 17,500 pediatrician offices have received free copies of a specially created version of the book including growth charts and parent handouts. "We are reducing BMI or weight in students who are participating in our program and they're consuming fewer sugar-sweetened beverages, more fruits and vegetables, and are developing healthier eating and exercise habits overall. That's our goal, to ensure this program is really having a positive impact on kids' health," says Ehrlich.
In our annual HealthLeaders 20, we profile individuals who are changing healthcare for the better. Some are longtime industry fixtures; others would clearly be considered outsiders. Some are revered; others would not win many popularity contests. All of them are playing a crucial role in making the healthcare industry better. This is the story of Patrick McGuire, CPA.
This profile was published in the December, 2012 issue of HealthLeaders magazine.
"There was this lingering mistrust with the physicians so we came to the conclusion we had to burn down our old way of doing things and start anew."
Patrick McGuire, CPA, the senior vice president and CFO at St. John Providence Health System in Warren, Mich., is not your average finance leader. Like many of his peers, he's played a pivotal role in his system's financial transformation, but it's his innovative approach to physician partnership that sets him and his organization apart.
"I feel like my greatest achievement has been maintaining the financial wellness of the organization in one of the toughest markets in the country," says McGuire. Indeed, two of Michigan's three largest employers declared bankruptcy during the recent recession, which caused an economic cascade that bankrupted numerous other state businesses and spurred massive layoffs. McGuire watched as his community's economic crisis led to a growth in the system's uninsured population, testing the organization's ability to creatively reduce costs.
"We had to do what we could to keep our costs in line, but we also had to keep our focus on our mission. We didn't stop caring for the uninsured as they came into our ER. We needed to try to be a vibrant beacon for our community during a very challenging time," he says.
Since joining St. John Providence Health System in 1986, McGuire has helped his system through numerous ups and downs. He's worked to grow the system from a single hospital to seven, helped diversify the enterprise across five counties in southeast Michigan, and saw the organization become the largest single component of Ascension Health, which is the nation's largest Catholic and nonprofit health system, and the third-largest system (based on revenues) in the United States.
McGuire has provided strong financial leadership for the $2 billion health system and stood as a unifying voice for Ascension Health Michigan Ministries when it negotiated a five-year agreement with Blue Cross of Michigan. Unquestionably McGuire is a seasoned healthcare finance veteran, but for all his experience McGuire believes no one can afford to stop chasing innovation.
In 2010, McGuire found himself in unfamiliar territory as the system planned to move into delivering coordinated care to patient populations, and to do that it would need to forge stronger physician relationships. Nationally, some organizations had begun establishing comanagement agreements to meet those ends, but McGuire felt that that approach only partially exemplified the unified approach of St. John Providence.
"We had long standing relationships with our physicians going back to an early 1990s PHO … but we got to 2010 and looked at our alignment with physicians and we realized our physicians didn't view the partnership as much of a partnership, at least not as much as we did," he says. "From an administrative standpoint we believed we had trust and engagement and that we were looking out for the best interest of our physicians, but it became apparent that some physicians didn't see it that way."
Though disheartened by the realization that the organization and it physicians weren't aligned, McGuire and the leadership team became invigorated by the idea of creating something new—a truly equal partnership between the system and the physicians.
"The future of healthcare will require us to significantly partner with the physicians to be successful," says McGuire. "We wanted to move forward on path of mutual alignment where it wasn't us versus them. But there was this lingering mistrust with the physicians so we came to the conclusion we had to burn down our old way of doing things and start anew."
However before an equal partnership could be solidified, the six separate physician groups had to unify and have one voice at the table. The process took nearly a year but in January of 2011, the six St. John Providence-affiliated physicians' organizations became one—The Physician Alliance.
The newly created physicians' organization, consisting of more than 2,300 Michigan doctors, announced a progressive mission: "The organization will assure a more synergistic partnership with St. John Providence Health System and its hospitals, including evolution toward an accountable care organization while maximizing pay-for-performance income for our physicians. The key focus will remain on educating providers around clinical excellence and newly evolving market trends as well as development of strategic contracting opportunities, including risk contracting when appropriate."
In May 2011, The Physician Alliance created an equal partnership with St. John Providence Health System to become SJP Partners in Care. The partnership also required a significant investment to The Physician Alliance by St. John Providence for IT (including an EMR, health information exchange, and patient portal) and other infrastructure changes to encourage better communication and management of care.
SJP PIC created three boards to provide leadership for the organization's activities, including physician services and support, utilization and quality improvement, and finance and contracting.
"We felt the foundational principle of this partnership should be that everything is 50/50 to the extent possible, so we have two co-chairs of the organization—our CEO Dr. Patricia Maryland and the Physician's Alliance vice chairperson Dr. Daniel Megler—and for all boards," explains McGuire. "We've always felt we worked in partnership but to really demonstrate that and to work closely with The Physician Alliance on these committees ensures transparent and candid discussion about all of our issues."
With SJP PIC in place, the organization has begun moving swiftly toward growing its population health offering, expanding its patient-centered medical model dubbed the PCMH Neighborhood and developing an accountable care organization. "We can't predict with precision what the future will look like but we know we need to change based on what we do as an industry and what the federal government does. So when you're shaping a future without knowing what to expect, you need core principles to believe in and this partnership fits those. We all know, and our payers have told us, this is a very unique arrangement," says McGuire.
"I want the physicians to be the most successful in our market and they want us to be successful. And if I'm not building something to make them successful from a clinical and patient satisfaction standpoint, then I'm not building anything with staying power. If you start with the premise that you're really equal partners you'll have a successful recipe for the future," he concludes.
This article appears in the November 2012 issue of HealthLeaders magazine.
With the Patient Protection and Affordable Care Act ushering in the pay-for-value era, healthcare organization compensation committees are scrutinizing executive compensation models to stay in step with new objectives. Though few external benchmark resources are available to help create the guiding metrics, boards continue to try to shift away from rewarding solely on organization-wide financial performance and move toward incentivizing for quality and patient satisfaction. Ultimately, though, fiscal goals still dominate when it comes to incentivizing the C-suite.
Physician compensation structures have opened the door for organizations to rethink their approach to paying and rewarding employees. Over the past few years at organizations nationwide physician compensation models have transitioned from fee-for-service to pay-for-performance with an eye toward encouraging better patient population health management. However, based on national compensation surveys, it would appear as though healthcare executive compensation structures have yet to make a similar structural shift. But that change is under way.
Kathryn Hastings, managing director and practice leader for Sullivan, Cotter and Associates' executive compensation practice, says the transition is happening slowly as boards assess which metrics to tie to incentives in order to encourage or maintain alignment. Boards are feeling the pressure from both the public and the government to reduce organization costs, she says, but they must weigh that against the need to compensate fairly to attract and retain key leaders.
"To create new quality-centric models, what the boards and the industry need—and they are beginning to get—are really good benchmarking resources, such as those from Truven Health Analytics on performance objectives and other performance data. That way they aren't just benchmarking against themselves but against everyone else—and even when this data comes out, it's still going to be challenging to apply it because some of it will depend on an organization's payer mix among other factors," Hastings says.
Sally LaFond, a senior consultant with Sullivan, Cotter and Associates, says she sees new measures, including quality, safety, and patient satisfaction, being added throughout the C-suite incentive structure, though generally incentives are still being applied annually instead of long-term.
"Boards are now weighting incentive goals for the CEO and other members of the team. However, we're not seeing the move away from annual incentive goal setting; rather, we're seeing the board take an additional interest in how to structure and add in long-term performance planning goals," says LaFond.
A survey by another consultancy, INTEGRATED Healthcare Strategies' Spring 2012 Salary Increase, Incentive and Benefit Updates shows that of the 75% of respondents that have incentive plans for executives, approximately 25% said the plans will be changed this year. Another 38% of hospitals and health systems will use physician alignment as a criterion in their incentive plans.
Using weighted incentives to hit goals
The Christ Hospital Health Network in Cincinnati has changed how it approaches incentivizing executives. Five years ago, the organization moved away from rewarding executives based solely with base pay and instead began structuring a weighted incentive and bonus plan that rewards the attainment of strategic goals.
"Physician compensation models changed, and our hospital reimbursement model changed, too. We knew to reach our goals it would take a tripartite effort so there had to be alignment in the compensation models between the board, the administration, and the medical staff," says Rick Tolson, vice president and chief administrative officer at the organization, which includes The Christ Hospital, a 555-licensed-bed, nonprofit acute care facility, and more than 90 outpatient and physician practice locations. The organization began making structural changes to how everyone is compensated, starting with the CEO and on down to the rest of the staff.
The board of directors established a charter for the compensation committee that included roles, accountability, and deliverables, and then called upon a consultant from the Hay Group, a global management consulting firm, to help establish reasonable executive base salaries and structure a new incentive plan, Tolson explains.
The Christ Hospital's initial approach toward establishing total cash compensation (base salary plus annual incentives and bonuses) for its CEO and other members of the C-suite followed the industry's best practices; however, where the organization made new inroads was in creating a metric-driven annual and long-term incentive plan.
"We were interested in understanding how to arrive at a reasonable base pay, but also in incentive compensation both annual and long-term and creating a beneficial structure. We wanted to ensure market competitiveness to retain the best talent, but we also didn't want to be placed in a position where our compensation could be viewed as being excessive," Tolson says.
The board took a forward-facing look at how PPACA would change the delivery of care and restructured its plan to incentivize quality outcomes and patient service, along with strong financial performance. To that end, each year the compensation committee develops critical success factors or metrics that tie to the incentive plan for the executive team.
"We start with the strategic plan and we look at our clinical portfolio and the quality outcomes; patient, physician, and employee satisfaction; growth; medical staff; and facilities. We select metrics to focus on that to drive our initiatives," says Tolson. For instance, to encourage clinical improvements it uses metrics to look at overall outpatient ratings from Press Ganey and inpatient metrics for HCAHPS. At 10% each, the total for these categories is weighted at 20% out of 100%, and for the incentive to be paid, they must reach predetermined targets.
Nevertheless, the percentage of incentive paid out still depends on where the organization lands overall, along with where the critical success factors land on meeting its targets. There are seven metrics the organization tracks, and no incentive bonuses are paid unless the organization reaches its financial performance goal.
"If we don't achieve the performance in our cash flow, then we don't have the resources to fund and sustain the organization for the future," says Tolson, and some years the organization has not paid incentives. Though financial goals are important, Tolson says the organization acts to motivate employees to pursue the quality and patient satisfaction goals, as that is the means to the financial ends.
"When you have a compelling strategy as an organization, you attract great physicians, employees, and leaders; everyone wants to be on a winning team. Then, to deliver a great product—in our case, healthcare—you must provide great service and quality, and the outcome of that is financial performance," he says.
While most organizations continue to use annual incentives, Tolson says, The Christ Hospital added a three-year rolling incentive to encourage long-term thinking by its executives.
"We have strategic plan for 7–10 years and a long-range financial plan for 7–10 years, so if we get off track, then we're not going to be able to deliver on those plans.
We found that long-term incentives are a vehicle for performance acceleration," says Tolson. "We realized early on if we are to succeed with this plan, we couldn't isolate incentives to yearly performance or we may find that some executives might cannibalize the next year's performance to hit this year's targets."
As a result, all members of the executive team have both annual and long-term incentives, and all members of the team have the same core goals, in addition to individual goals. For instance, the CEO has an annual incentive plan with exactly the same goals as the vice presidents under him—with two differences, Tolson says; one is the amount of award potential and the other is 100% of the CEO's annual incentive plan is based on the network's overall performance, which includes meeting all of the network's critical success factors (patient satisfaction, quality, growth, and cash flow
from operations).
By comparison, the rest of the C-suite's incentive payout is based on 67% of the network's critical success factor performance and 33% of the individual's critical success factors. A similar incentive structure is used with the rest of the system's employees, so directors and managers are on annual incentive plans tied to the same strategic metrics, with 50% of their incentive payout based on network performance and 50% on individual performance.
Critical success factors for the organization are determined by teams led by the organization's vice presidents. For instance, when looking at patient satisfaction, one team would look at historical internal and external performance data and make recommendations on threshold, average, and maximum targets for this area and propose a weight for inpatient and outpatient goals. Then the recommendation is taken to the appropriate board committee to vet and discuss the metric.
"We have an incentive plan for everyone in the organization, and so the target level performance and the percentage of potential payout is also calculated. We accrue that potential liability as we go on through the year. If the plan triggers, we have the money to pay out, and if it doesn't, the money goes back into the network," Tolson explains.
Using organizationwide and individual quality and satisfaction metrics to spur the payment of incentives from the CEO on down to the rest of the staff is proving successful at aligning the entire organization toward achieving its goals, Tolson says. Net operating revenue surpassed its goal by 11.3% in 2010, 8.6% in 2011, and 6.8% as of July 2012. Moreover, for 2010, 2011, and through July 2012, adjusted admissions—a core strategic goal—rose 5.9%, 7.3%, and 1.1% respectively.
Metrics, benchmarks create line of sight
Nearly three years ago, Trinity Health in Livonia, Mich.—which owns 36 hospitals, manages 12 others, and has a large network of outpatient, long-term care, home health, and hospice programs across 10 states—revised its executive incentive structure. Debra Canales, executive vice president and chief administrative officer at Trinity Health, says the renegotiation of payer rates; changes in pensions, regulations, and reporting; the evaluation of its market; and activity prior to the approval of the PPACA all contributed to the organization's reassessment of its compensation model.
The board compensation committee called on Sullivan, Cotter and Associates to help it set reasonable base salary compensation for executives. Then Trinity Health altered its incentive structure to align everyone, from the CEO to the organization's staff, to focus on five areas: community benefit, care experience, quality, best people, and stewardship. Online scorecards set metrics using internal benchmarks so staff can track the hospital's and the entire organization's performance.
"We wanted to create a line of sight from the top down that tied to our strategic plan," says Canales.
"At a for-profit hospital you might see these [goals] tied to stock options or performance shares, but we don't have that as an option. Nevertheless, our board wanted us to be accountable for our progress, and what better way to encourage everyone to be accountable than by putting pay at risk on both an annual and a longer-term basis. We apply various weights to reflect the importance of the goals in our plans," explains Canales.
In addition to varying the weight of a goal, Trinity Health uses a mix of annual and long-term incentives for executives and pairs these with group and individual incentives. For instance, one year the health system wanted to advance diversity and inclusiveness across the entire organization. To make it a priority for all leaders, it made implementing a diversity plan for each division related to its at-risk compensation program—meaning every executive in the top 200 had to create and define a program, or none of the executives would receive an incentive payout.
"In fiscal year 2013 our objective is to define a plan that results in a template for the ministry and hospitals to follow for population health management, and we'll set benchmark targets and a maximum payout," says Canales. "We've been at this for two years now, and we're starting to get some discipline and rigor around how we track and measure goals and we're getting better at narrowing our focus. It's a very different approach than what we took a few years ago, and we are seeing success at aligning everyone in the organization."
In the past, a core set of goals and a larger number of strategic imperatives were shared by all of Trinity's teams. Many of the goals focused on infrastructure improvements and individual region or specific hospital objectives, Canales says. However, the organization knew it could do better at achieving its goals by creating ones that fostered a new level of teamwork and integration across the entire organization.
"For example, our hospital executives can earn some of their at-risk compensation when their hospitals launch a senior emergency center, as defined by us. The leaders' success and reward are determined based on their assessment and how it meets the community needs, implementation time frames, and quality of care," she says.
Canales says the organization works in a similar way when assessing, measuring, and rewarding the development of clinically integrated networks, the launch of community needs assessments, and the development of shared service organizations.
"Goals like these are complex, requiring support and performance from a broad cross-section of integrated teams. This type of goal setting and focus is helping us accelerate our achievements by leveraging our talent across the organization like never before," she notes.
Achieving results through weighted incentives
Though both Trinity Health and The Christ Hospital vary the weight of their incentives based on the importance of the objective, in response to the changes in healthcare in the past two years, Cincinnati-based Catholic Health Partners uses its executive compensation model to evenly weight incentives around financial, community benefit, and patient experience objectives. CHP is one of the largest nonprofit health systems in the country, with $5.4 billion in assets and employing 32,000 people at more than 100 organizations, including 24 hospitals.
With such vast holdings, the system had been using regional compensation committees and consultants to establish executive-level compensation, until this year when it centralized that function so it could create better alignment and cost efficiencies.
"Historically we had a system policy that defined our compensation philosophy at a system level, but that allowed for a significant amount of variability among the regions in terms of pay. We liked what that regional approach achieved from an accountability standpoint, but we found that as we moved toward better efficiency it was impeding us," says Joe Gage, senior vice president of human resources for CHP. "By aligning executive compensation structures and policies across the system we feel we can retain talent and improve mobility of executives throughout the system."
Gage says the organization is highly metric-based, so it made sense to incorporate consistent measures into senior management's compensation structures and scorecards. CHP uses a balanced, or equally weighted, incentive model to encourage improvements in quality, physician partnership, growth, stewardship, and human potential.
"For over a decade we've derived benchmark metrics based on achieving our strategic plan, which is set and approved by the board and incorporated into the CEO's compensation model. We use these metrics to maintain strategic direction," Gage says.
For instance, if CHP wants to improve upon patient experience, then it is puts that metric into the quality goals. But if the organization as a whole doesn't achieve the minimum level of improvement predetermined by the board, then none of the executives is eligible to earn an incentive payout.
"We all use the same metrics to create alignment, but we measure specific results at the appropriate level to achieve accountability. For example, system leaders are accountable for achieving system results for patient experience, while region leaders are accountable for achieving region results on the same metric. Regional results roll up into the system total," says Gage. To keep the compensation plan measurement relatively simple, it limits the metrics it tracks to 21 across the five core areas.
"To make sure that no one is tempted to short-end the quality goal or stewardship goal in order to achieve the financial goal, we made them all of equal value. After the CHP board determines if the threshold metrics have been achieved, the board uses CHP's independent internal auditor to audit performance before assessing overall results; the board then makes a judgment on whether to award an incentive payment," Gage notes.
CHP's strategic plan has five key result areas: quality, human potential, physician partnership, stewardship, and growth. Metrics in these areas are selected by the board annually. In 2012, for instance, CHP selected these scorecard metrics:
Quality: preventable harm, inpatient mortality, inpatient readmission rate, length of stay, inpatient experience, patient-centered medical homes, behavioral health
Human potential: associate engagement, diversity of senior leadership team formation and development, associate health
Physician partnership: primary care employment/affiliation, net patient revenue/provider FTE
Growth: net operating revenue, emergency department quality and efficiency
Stewardship: operating margin, strategic plan development
The organization tries to limit the annual scorecard to approximately 10 operational metrics; in 2012 it has 11 equally weighted ones and an additional 10 measures that are either strategic or owned personally by the CEO.
Gage says CHP did look at the compensation structure last year with an eye on whether to add in long-term incentives, but with the move toward centralizing the process the organization decided it wasn't the right time.
"When we want to add emphasis to a strategic initiative, we can still add it as a goal; those become the annual goals for the executives," he says. "CHP's five-year strategic plan does have metrics, but our experience is that long-term metrics can be difficult to identify, elusive to benchmark, and often overlap with our annual metrics. So we use our annual scorecard metrics to measure and reward progress toward attaining our five-year plan in incremental, measurable steps."
Quality and patient satisfaction: Metrics of the future
The move by some organizations toward using quality and patient satisfaction metrics to align the C-suite to achieve more than the organization's financial performance goals is a step in the right direction, says Thomas Dolan, PhD, FACHE, president and CEO of the American College of Healthcare Executives, based in Chicago. But, he adds, one thing that any healthcare organization should move away from in the TCC for executives is the use of perquisites, free privileges paid by the organization, such as club membership, which must be reported on Form 990.
"The public doesn't like perquisites; they want to know why someone who earns a huge salary can't pay their own golf membership. I recommend that executives take compensation in salary and bonuses rather than perquisites, as they are hard to defend," says Dolan. "The way incentives should be constructed should be very cut and dried so people can understand them and the organization can justify them."
Thus far, however, perquisites don't appear to be disappearing from the C-suite compensation package and are on the rise. A 2012 Equilar, Inc. Nonprofit Healthcare Institutions Report notes that 87% of healthcare institutions provided perquisites or had reimbursement policies in place for their officers in 2010, up from 84% the year before. (Equilar's data was derived from tax returns from fiscal year 2010.) The most common benefit granted to executives is club dues, provided by 43% of organizations in the study.
The perquisites can include cars, country club memberships, cell phone allowances, extra paid time off, 403(b) retirement plans, severance benefits, and supplemental retirement plans, all of which are now subject to public scrutiny as they must be reported on Form 990. Hastings, with Sullivan, Cotter and Associates, says compensation committees need to reassess how their executives' total compensation package reflects upon and supports the organization's overall mission.
"Form 990 highlights executive compensation, and people see those salaries and may take issue with them. But if an organization can justify how it arrived at those numbers, then it becomes less of an issue," Hastings says. "But they should be prepared to defend their decisions."
There is a continual push for transparency at healthcare organizations and the Senate Finance Committee is making moves toward encouraging healthcare organizations to that end. Currently the committee is reviewing a draft proposal that would eliminate an organization's ability to offer perquisites, and would require organizations to make publicly available which compensation surveys and thresholds are used to benchmark the reasonableness of an executive's compensation. If this passes, this criterion would be in addition to the information that must be provided for IRS Form 990.
As organizations strive to align the compensation of CEOs and C-suite leadership with the new healthcare objectives, the use of metric-driven short- and long-term incentive plans will become increasingly dominant, Hastings says.
Plus, as organizations seek to transform care delivery over longer periods, long-term incentives can become a useful retention tool toward building leadership continuity in the C-suite, she notes.
"This is still a gentle shift toward incentive-based performance pay, and it's not going to happen overnight for all organizations," Hastings says.
This article appears in the November 2012 issue of HealthLeaders magazine.
