Reassessing Executive Compensation

As the healthcare industry shifts from volume to value, hospital and health system leaders need to consider new skill sets, new business models, and new incentives for the C-suite.

This article appears in the November issue of HealthLeaders magazine.

At its most basic, population health involves improving the health status of a given population by ensuring that members of the population are receiving the healthcare they should be receiving. How? First, one has to define the population. Then one must know what care the population is receiving. Next, identify gaps by comparing the care the population is receiving with the care the population should be getting.

Finally, the care delivery system must be able to address care gaps. Although the tactical implications of these simple statements are considerable, the first order of business for many healthcare providers is to try to sort out financial issues.

The major structural shifts affecting the healthcare industry are manifested in executive compensation programs, which are starting to reflect the industry's new value-based direction. Survey results show that compensation programs emphasize collaboration, foster working with new financial models, and reward clinical performance.

Rewards based on financial performance still count, of course, but our report advisors expect that compensation based on clinical volume metrics will be on the wane. Because most industry evolution scenarios indicate organizations will collaborate a lot more, some organizations and individuals will require new skills for success in new directions. Collaboration skills are highly desired, as are physician alignment skills. And the new financial realities mean that some "old" skills, such as cost containment expertise, remain highly valued, as well.

Financial and clinical metrics

Compensation has not been static, but increases are modest for most. Half (51%) expect an increase in total compensation next year. For 60% of those who expect compensation to rise, increases will be 3% or less. But we should not interpret modest compensation growth as a sign of stability. The financial foundation of the healthcare industry is in flux, and compensation committees are redirecting the attention of healthcare leaders through changes in compensation programs, mostly with changes in incentive programs.

"We've always had a financial discussion," says Joseph Pepe, MD, president and CEO of CMC Healthcare System in Manchester, N.H., which includes Catholic Medical Center, a 330-licensed-bed not-for-profit hospital, "but in the past quality and patient satisfaction tended to be in the background with most boards and in most C-suites."

As Pepe suggests, operating margin, a longstanding compensation stalwart, is mentioned by 67% as a basis for incentive compensation. Virtually the same percentage say that their incentive payments are based on patient satisfaction (64%) and clinical performance targets (63%). This combination of financial performance and clinical performance at the top of the chart of incentives is virtually identical to the responses provided last year. These same items top the list of incentives for what leaders expect next year, too, with nearly identical percentages.

Although only 20% of respondents say that the transition to value-based reimbursement metrics is part of their incentive program, Pepe, who serves as lead advisor for this report, sees broad support for value-based metrics among both current and future incentives, especially when considering the popularity of metrics such as patient satisfaction and clinical performance.

"Incentives are slowly moving to the value world," Pepe says, "and I think over the years to come that gap will close, and you'll see the value metrics surpassing volume metrics." One-quarter of survey respondents (25%) say that the transition to value-based metrics will be part of their incentive program next year.

New structures, new incentives

Akram Boutros, MD, FACHE, CEO of the MetroHealth System, a 731-licensed-bed health system based in Cleveland, approaches a complex long-term objective by breaking it into manageable short-term steps. He explains, "You know, everybody wants to do population health management. But population health management is so overwhelming that many people have decided not to do it. So we work it back. We want to do population health management three or four years from now. We ask ourselves what we have to do to get that. And then we walk it back from our future goal to today, and we develop the steps."

MetroHealth expects to become an ACO starting in 2014, a step toward population health management. Boutros, an advisor for this report, explains that performance-based compensation specifically related to collaborative care will likely be folded into other metrics, especially early on. "While collaboration along the care continuum will be strategic to us, it could be baked into the financial results of the organization, or could be baked into the quality quadrant. For us right now, it is not one of our metrics. Do I see it as a critical part for success in the future, or do I see it as a metric in 2014 or at 2015? Absolutely."

As MetroHealth makes the change from volume to value, Boutros also expects to track the proportion of outpatient to inpatient services, "so that we're rewarding the transition at the pace that we've determined that's best for that institution."

To support his hospital's foray into ACOs, Pepe has put in place near-term goals that will support both care coordination and at-risk payments. "The goal for executives will be that we need to turn over a certain number of practices to a medical home. That will be part of how we get compensated in the future." Also, Pepe has made the effort toward collaborative care institutionwide by switching physicians from volume-based incentives to incentives based on clinical quality measures.

"We changed all the contracts of the primary care physicians from being based purely on RVUs, to incentives based on population health parameters such as quality, preventive measures," Pepe says. Physicians also have metrics related to how well they work with clinical staffers such as physician assistants and nurse practitioners. "That's a good part of their incentive compensation as well, to help us align everyone together."

Advisor Bonnie Bell, executive vice president of people and culture for Texas Health Resources, a Texas-based health system with 25 hospitals and 3,800 licensed beds, summarizes the quandary that compensation committees across the industry are facing as they strive to ensure that their incentive programs are in sync with the strategic directions their organizations are taking. "We are all creating this at the same time, together, as we look at or look away from traditional measures. In terms of looking for appropriate measures, finding benchmarks—they don't exist. And we don't have a common language or nomenclature around measurement yet," she says.

As a result, many early incentives that address, broadly speaking, healthcare reform, depart from outcome measures that have been so important in defining clinical performance recently. "Our new metrics are very process driven," Bell says. "They are not traditional specific outcome metrics, benchmarked to a national database. But they do get us along the way."

Pepe has moved his executive team and physicians off of volume measures altogether. "When you look at what we're incentivizing, it's not just about the bottom line, the operating margin. It is growing the continuum of care, increasing the number of primary care lives, and covering quality aspects like maintaining our 30-day readmission rate below the state's or the nation's.

It's increasing the percent of staff that gets flu vaccines. It is increasing the HCAHPS top-box score for cleanliness of hospital environment, and increasing the CGCAHPS top-box score for giving easy-to-understand instructions. These are all part of our incentives that we never would even consider before. Before, it was all about volume—how many surgeries, how many people need ED, and how many admissions that we were having. None of those are among our goals this year."

Care continuum skills needed but missing

Advisors acknowledge that addressing new challenges will require new skills. Says Bell, "Our board spends a lot of time talking about the behavioral competencies that will lead to success. And when I say behavioral competencies, I'm talking about things like the ability to successfully forge new kinds of business models, or to demonstrate bold and innovative thinking."

As was the case in last year's survey, physician alignment is the skill mentioned most frequently as being important in ensuring CEO success, mentioned by 61%. Nearly half (49%) include the ability to optimize results along the continuum of care as a skill needed for a CEO to succeed in five years, an increase of 10 percentage points over last year's survey. Both skills are mentioned most frequently as skills that their CEO is lacking.

Among non-CEOs, cost containment (64%) and performance metrics (58%) topped the list of skills that are required for C-suite success. But nearly half mentioned the ability to optimize performance along the continuum of care (48%) and physician alignment (45%). And care continuum skills and physician alignment skills top the list of non-CEO skills that are missing. Says CMC's Pepe about care continuum skills: "This is an important team skill that traditionally has not been present in the C-suite. CEOs are going to rely heavily on non-CEO C-suite executives obtaining this skill in order to move down the road of bundled services and value-based care."

Bringing skills to C-suite

When assessing how best a CEO can add the missing skills that are needed, more than one-third (36%) say that their CEO could rely on the skills available with non-CEO staff, while 30% say that training could fill in the CEO skills gap. Training is the skill-acquisition method mentioned most frequently (by 51%) as the most likely scenario for adding those skills among non-CEOs.

It's generally acknowledged that exposure to the clinical environment helps executives with both physician alignment and collaborative care activities. Filling the skills gap by bringing in new C-suite talent from outside the organization is considered by about 13% or 14% of respondents.

Recruiting physicians with leadership skills or leaders with clinical skills can be problematic for some because of supply and demand issues. As Bell points out, "We're not the only one looking for physician executives. In this market we're doing it more aggressively than others, but I talk to my national peers who are doing the same thing. The hunt is on. Right now, demand definitely is outstripping supply."

Staff development is another way to bolster executive skills. Texas Health and others run physician leadership programs for staff physicians and members of their employed physicians' group. MetroHealth's Boutros reminds us that the existing leadership team knows the organization and its culture, so he favors developing or supporting the current team. "I believe new CEOs should either bring in executives now with the right set of skills, or provide opportunity for the executives who are here today who understand the culture and who have longevity with the organization. Or give your executives support in their departments to be able to manage new challenges. So you either do it by hiring new people or you do it by supporting the people who already are here. The latter is the way I prefer."

Noting that 36% of respondents say their CEO will address needed but missing skills by relying on the staff (the top response), Boutros observes, "It says to me the CEO is using more teamwork and less self-reliance. In the past a CEO might have said, 'I'm going to be the captain of the ship. I'm the only guy who's going to be able to do it.' Now CEOs are saying it is really about a team effort."

CMC's Pepe also sees the CEO position as one requiring communication and collaboration skills. "I think education of the board and the ability to align physicians and other hospital staff are extremely important skills. Today and in the future, a CEO has to be a good communicator and collaborator. CEOs who are demanding control and are authoritative really do not have a major role in today's health systems."

The move to value

In just a couple of years, CMC has shifted the basis for its incentive program from 100% volume-based to one that is largely value-based. "We're still living in a volume world," Pepe says, "but I think at CMC we're way ahead of the pack when it comes to knowing where we want to go and putting our money where our mouth is. A lot of people talk about value, but they're still being incentivized almost wholly in the volume world. It's a big change, and it's a culture change, but when I talk to [our] executives, managers, and directors, they understand that we're doing this in interest of the population we serve and the community we serve. They get it. I realize that we're still living a good portion in the volume world, but we have to start making these changes or we won't be prepared for the future."

Reprint HLR1113-3

This article appears in the November issue of HealthLeaders magazine.