Setting CEO compensation is an intricate dance that’s intertwined with overall hospital performance. Boards want to pay a CEO well enough to ensure that he or she is getting the best possible expertise for a very tough job, and they want to structure the compensation in a way that incentivizes the CEO and everyone who reports to him or her to put in a great performance.
“This has always been a delicate balancing act, but in the pay-for-performance era it has suddenly become a lot trickier,” says Quint Studer, founder of Studer Group. “And as organizations seek to hardwire profitability, getting CEO compensation right is more critical than ever.”
Traditionally, the typical CEO has been given a base salary plus a bonus connected to how successfully the hospital meets a certain set of goals. The better the hospital performs, the more the CEO gets paid.
Let’s use Community Hospital as an example. The CEO gets $200,000 in base pay and up to a 30 percent bonus ($60,000) for meeting specific performance criteria. (Other senior leaders may enjoy similar compensation structures that include, for example, 20 percent of their base pay.)
Perhaps one of the CEO’s incentive goals is connected to patient falls. The hospital is having too many falls, so it sets a goal to reduce them by X percent. There’s a built-in trigger rate the hospital has to meet before the CEO gets any bonus at all. Once that trigger rate has been met, the CEO will get at least a percentage of the bonus. (If 70 percent of the benchmark goals have been met, the CEO will get 70 percent of the bonus.)
“Of course, the patient fall goal is only one of the criteria that goes into the bonus,” says Mr. Studer. “Bonuses may be contingent on three or more areas of performance — financial, quality, patient experience, staff and physician satisfaction, etc. And, within each of these areas could lie numerous benchmarks that determine incentive payout.”
Boards and CEOs have agreed to this system for years. It makes sense to them.
However, all of this assumes the hospital is maintaining a workable operating margin. The average hospital’s is 2.2 percent. That margin is critical. It’s what allows CEO bonuses to be paid, sure, but it’s also what allows for investment in new technology, renovations, and so forth — all the things that enable the organization to provide excellent patient care.
Now that pay-for-performance has come along the entire ballgame has changed. As CMS begins withholding reimbursement (as part of its Value- Based Purchasing program) based on performance in various areas — process of care measures, patient perception of care, readmissions, healthcareacquired conditions and so forth — margins that may already seem razor-thin are being threatened.
This withholding has already started but it’s not nearly as challenging as it’s going to get: withholding percentages will steadily increase until, by 2018, more than 11 percent of a hospital’s CMS reimbursement will be at risk. That is a huge amount of money, says Mr. Studer; for some organizations it’s the difference between having to shut down operations and being around to save lives in the future.
The message is clear: It’s going to get harder and harder to keep margins at sustainable levels. Requirements will get progressively stricter. The criteria CMS measures will change. Hospital performance in all areas will have to get better and better just to maintain the old operating margins.
“This is why I like to talk about healthcare being a downward moving escalator,” says Mr. Studer. “Organizations can’t just stand still and expect to stay on the same level. They have to improve every year, and in ways that are not always easy to predict, just to maintain basic profitability.”
So what does this mean for boards looking to hire new CEOs and renegotiate with old ones? Mr. Studer offers the following suggestions:
• Boards need to understand the new reality hospitals face. Many boards are made up of community and business leaders who may not be familiar with running a healthcare system at all — let alone a healthcare system in a pay-for-performance environment. Make sure your board gets at least a solid crash course in the financial realities of value-based purchasing.
“This will allow boards to make educated decisions on what goals need to look like in order for their organization to stay competitive,” says Mr. Studer. “They need to know that goals may need to be much more aggressive than they were in the past. And they may need to realize that what may seem like lackluster financials are actually pretty impressive when you consider the external environment.”
• CEOs need to be courageous in their goal setting. Mr. Studer says a health system CEO asked him for advice on how to get his organization’s executive team to support improving HCAHPS scores. He’d had difficulty getting them to take the issue seriously. Mr. Studer suggested the CEO make a truly far-reaching goal part of his and the other executives’ bonus benchmarks. He then further suggested the benchmark HCAHPS score be used as the trigger.
“Yes, it can be unnerving to set truly challenging goals,” he admits. “But I find that people in healthcare tend to be motivated more by achievement than by dollar signs. A mature CEO who is really willing to stretch himself or herself may find there is no better way to improve performance.”
• Both parties need to agree on the importance of hardwiring profitability. Yes, it’s critical to hardwire the tools and techniques proven to “move the needle” on the quality metrics tied to reimbursement. But that’s just part of the story, says Mr. Studer. Most organizations know what to do. What we don’t always know is how to make sure that “what” happens with every employee, every patient, every time — and that it keeps happening over the long haul.
“I’m talking about instilling a culture of accountability,” he says. “That’s what keeps quality up consistently, which keeps reimbursements up, which over time keeps margins up. That’s what makes an organization profitable. The profitability is hardwired in. Yes, the particulars of pay-forperformance are going to change but what’s not going to change is the mindset and the commitment that makes the improvements possible.”
Culture always begins at the top, says Mr. Studer. That’s why the CEO and the board need to be united in their commitment to keeping the organization quality-focused and profitable.
“If this commitment is truly mutual, issues like CEO compensation structures will fall into place,” he says. “It may take some fresh thinking and the willingness to take a few risks, but in the end everyone involved will benefit — especially the patients we’ve signed on to serve.”
“This has always been a delicate balancing act, but in the pay-for-performance era it has suddenly become a lot trickier,” says Quint Studer, founder of Studer Group. “And as organizations seek to hardwire profitability, getting CEO compensation right is more critical than ever.”
Traditionally, the typical CEO has been given a base salary plus a bonus connected to how successfully the hospital meets a certain set of goals. The better the hospital performs, the more the CEO gets paid.
Let’s use Community Hospital as an example. The CEO gets $200,000 in base pay and up to a 30 percent bonus ($60,000) for meeting specific performance criteria. (Other senior leaders may enjoy similar compensation structures that include, for example, 20 percent of their base pay.)
Perhaps one of the CEO’s incentive goals is connected to patient falls. The hospital is having too many falls, so it sets a goal to reduce them by X percent. There’s a built-in trigger rate the hospital has to meet before the CEO gets any bonus at all. Once that trigger rate has been met, the CEO will get at least a percentage of the bonus. (If 70 percent of the benchmark goals have been met, the CEO will get 70 percent of the bonus.)
“Of course, the patient fall goal is only one of the criteria that goes into the bonus,” says Mr. Studer. “Bonuses may be contingent on three or more areas of performance — financial, quality, patient experience, staff and physician satisfaction, etc. And, within each of these areas could lie numerous benchmarks that determine incentive payout.”
Boards and CEOs have agreed to this system for years. It makes sense to them.
However, all of this assumes the hospital is maintaining a workable operating margin. The average hospital’s is 2.2 percent. That margin is critical. It’s what allows CEO bonuses to be paid, sure, but it’s also what allows for investment in new technology, renovations, and so forth — all the things that enable the organization to provide excellent patient care.
Now that pay-for-performance has come along the entire ballgame has changed. As CMS begins withholding reimbursement (as part of its Value- Based Purchasing program) based on performance in various areas — process of care measures, patient perception of care, readmissions, healthcareacquired conditions and so forth — margins that may already seem razor-thin are being threatened.
This withholding has already started but it’s not nearly as challenging as it’s going to get: withholding percentages will steadily increase until, by 2018, more than 11 percent of a hospital’s CMS reimbursement will be at risk. That is a huge amount of money, says Mr. Studer; for some organizations it’s the difference between having to shut down operations and being around to save lives in the future.
The message is clear: It’s going to get harder and harder to keep margins at sustainable levels. Requirements will get progressively stricter. The criteria CMS measures will change. Hospital performance in all areas will have to get better and better just to maintain the old operating margins.
“This is why I like to talk about healthcare being a downward moving escalator,” says Mr. Studer. “Organizations can’t just stand still and expect to stay on the same level. They have to improve every year, and in ways that are not always easy to predict, just to maintain basic profitability.”
So what does this mean for boards looking to hire new CEOs and renegotiate with old ones? Mr. Studer offers the following suggestions:
• Boards need to understand the new reality hospitals face. Many boards are made up of community and business leaders who may not be familiar with running a healthcare system at all — let alone a healthcare system in a pay-for-performance environment. Make sure your board gets at least a solid crash course in the financial realities of value-based purchasing.
“This will allow boards to make educated decisions on what goals need to look like in order for their organization to stay competitive,” says Mr. Studer. “They need to know that goals may need to be much more aggressive than they were in the past. And they may need to realize that what may seem like lackluster financials are actually pretty impressive when you consider the external environment.”
• CEOs need to be courageous in their goal setting. Mr. Studer says a health system CEO asked him for advice on how to get his organization’s executive team to support improving HCAHPS scores. He’d had difficulty getting them to take the issue seriously. Mr. Studer suggested the CEO make a truly far-reaching goal part of his and the other executives’ bonus benchmarks. He then further suggested the benchmark HCAHPS score be used as the trigger.
“Yes, it can be unnerving to set truly challenging goals,” he admits. “But I find that people in healthcare tend to be motivated more by achievement than by dollar signs. A mature CEO who is really willing to stretch himself or herself may find there is no better way to improve performance.”
• Both parties need to agree on the importance of hardwiring profitability. Yes, it’s critical to hardwire the tools and techniques proven to “move the needle” on the quality metrics tied to reimbursement. But that’s just part of the story, says Mr. Studer. Most organizations know what to do. What we don’t always know is how to make sure that “what” happens with every employee, every patient, every time — and that it keeps happening over the long haul.
“I’m talking about instilling a culture of accountability,” he says. “That’s what keeps quality up consistently, which keeps reimbursements up, which over time keeps margins up. That’s what makes an organization profitable. The profitability is hardwired in. Yes, the particulars of pay-forperformance are going to change but what’s not going to change is the mindset and the commitment that makes the improvements possible.”
Culture always begins at the top, says Mr. Studer. That’s why the CEO and the board need to be united in their commitment to keeping the organization quality-focused and profitable.
“If this commitment is truly mutual, issues like CEO compensation structures will fall into place,” he says. “It may take some fresh thinking and the willingness to take a few risks, but in the end everyone involved will benefit — especially the patients we’ve signed on to serve.”