The only constant is change — and nowhere is this more true than in today's healthcare industry. The impact of healthcare reform cannot be overestimated. And when we consider reform in combination with other market forces (rising medical cost trends, growth in chronic care conditions, aging population, etc.), the pressure on healthcare organizations to perform is intense. Added to this volatile business environment is continued media scrutiny of executive pay in major healthcare organizations.
As a result, it's never been more important for healthcare organizations to ensure their incentive plans are focusing executives on performance metrics that will drive success in the new world of healthcare reform. It's also become increasingly important to reassure stakeholders that there is an appropriate link between executive pay and performance.
Under the Patient Protection and Affordable Care Act, CMS will withhold a portion of reimbursements from providers, who will have to earn them back based on relative performance against various quality indicators. We anticipate private insurers will eventually follow suit. The resulting link between quality and financial performance is manifesting itself in the form of incentive plan metrics that, if calibrated correctly, will enable organizations to tell their stakeholders a great story, demonstrating the link between executive compensation, quality and financial success.
In fact, the alignment between pay and performance can be demonstrated in a similar manner to that often used by publicly traded companies. While public companies often review the alignment of pay with total shareholder return, a similar comparison can be developed to illustrate the alignment between pay and quality scores (such as value-based purchasing metrics) for healthcare providers. This approach allows organizations to demonstrate the alignment of executive pay with the performance measures deemed critical under healthcare reform, as compared to a peer group. It also can be used as the basis for fine-tuning incentive programs and metrics.
Although healthcare reform has brought many changes (and challenges) to the healthcare provider industry, it has also opened up the door to opportunities. The approach to creating value in the industry is clearly changing. This presents a unique opportunity to reexamine executive incentive programs and ensure close alignment of pay with performance in a way that can be readily communicated to stakeholders.
Russ Wilson is an executive compensation consultant in Towers Watson’s Atlanta office and Susan Sulisz is a director in the executive compensation practice in Detroit and a leader of the firm’s not-for-profit consulting team. Email russell.wilson@towerswatson.com, susan.sulisz@towerswatson.com.
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