For some hospital chains and health insurers, CEO departures are anything but a clean break. Employment agreements outline long, expensive goodbyes that compensation experts say may be designed in part to enforce noncompete agreements.
Investor-owned companies like HCA Healthcare and health insurer Anthem have contracts in place with current and recently departed CEOs outlining the terms of paid consulting gigs they step into once their tenures as the top executive end. The contracts ensure leadership will continue to be paid handsomely for scaled-back workloads.
Even though Joseph Swedish retired from Anthem’s top spot in November 2017, the company pays him $4.5 million per year plus benefits to serve as a consultant and senior adviser to the CEO, currently Gail Boudreaux. The contract, which runs until May 2020, doesn’t spell out specific time commitments, but says he’ll perform duties assigned to him by the CEO “from time to time.” Anthem didn’t respond to requests for an explanation about the agreement.
Former HCA CEO R. Milton Johnson, who stepped down at the end of 2018, will make up to $3 million in base pay, stock awards and bonus pay in calendar 2019 plus benefits for his role as executive adviser. He also served as HCA’s board chairman through April 26. The agreement requires he work 20% of his average level of service in the three years before stepping down.
It’s not clear how common it is for companies to keep former CEOs on their payrolls as consultants. Modern Healthcare’s analysis was limited to large publicly traded health systems and insurers, but the practice could also take place at private and not-for-profit healthcare companies, although those contracts would not be publicly available.
Such deals may be struck in part to add teeth to noncompete agreements that preclude those CEOs from working at similar companies in the years immediately following their employment, said David McMillan, managing principal of strategy and integration at consultancy PYA. Noncompete agreements tend to be difficult to enforce, and adding pay into the mix strengthens them, he said.
“This might be a nice workaround to say, ‘I have you under contract and I’m compensating you. As part of that contract, you can’t compete with me,’ ” McMillan said. “In essence, I’ve just monetized the noncompete and created more enforceability so I don’t lose intellectual property.”
Several of the CEOs with consulting agreements also have noncompete agreements. HCA’s Johnson, for example, can’t engage in any work that competes with HCA for two years after his advisory role ends.
Dallas-based hospital chain Tenet Healthcare Corp.’s employment agreement with its current CEO, Ron Rittenmeyer, ends June 30, 2021. In each of the two years that follow, Tenet will pay Rittenmeyer $750,000 for working a maximum of eight days per month as a consultant. Rittenmeyer is also covered under a noncompete agreement that lasts for one year after he steps down as CEO.
A Tenet spokeswoman said post-employment consulting is a common way to ensure smooth transitions from one leadership team to another.
Franklin, Tenn.-based Community Health Systems’ former chief financial officer, Larry Cash, retired in May 2017, but still makes $300,000 a year working as a consultant for the investor-owned hospital chain. His employment agreement, which runs through March 2020, bars him from working for any CHS competitors, affiliates or suppliers during his time as a consultant.
The agreement with Cash gives CHS access to his 20 years of historical knowledge of company matters, CHS spokeswoman Tomi Galin wrote in an email.
Beyond enforcing noncompete agreements, there are other operational benefits to keeping former CEOs on the payroll. It adds continuity during the CEO transition period, with the former CEO acting as a sounding board for the new one, said Allen Reed, a partner in Odgers Berndtson’s healthcare and life sciences practices.
Deb Bilak, a partner with human resources consultancy Mercer, said companies sometimes transition the outgoing CEO to a consulting role when that executive has not yet completed a strategic initiative that was launched during his or her tenure. While the practice happens in other industries, it may be more common in healthcare given ongoing transformation in the sector.
“There’s so much going on in healthcare and health plans as far as consolidation and transformation that we are seeing that they want to retain that knowledge for a period of time,” Bilak said.
Compensation for consulting is typically based on what the executive was making as CEO and the time commitment required, Bilak said.
The consulting gigs, while high-paying, don’t pay the executives at the levels they made as CEO.
HCA’s Johnson made about $21.4 million in total compensation in 2018. Tenet’s Rittenmeyer made nearly $15 million in total compensation that year. Anthem CEO Swedish, meanwhile, made about $18.6 million in total compensation in 2017, his last year in that role.
Consulting agreements carry the potential downside of undermining the incoming CEO, especially if that person was recruited externally and there’s no established relationship between the new CEO and the organization, Paul Bohne, managing partner and healthcare practice leader with WittKieffer, wrote in an email. Staff members, directors and physicians are accustomed to the former CEO making decisions, and it can be tough to break those habits.
“Even with the best intentions, it is difficult to decondition others in the ways they were accustomed to working with the outgoing CEO,” Bohne said.
Not all outgoing CEOs become consultants. Organizations that want to retain the CEO’s knowledge may opt to put the executive on the board of directors instead.
After Michael Neidorff retires as CEO of Medicaid managed-care insurer Centene Corp. in 2023, for example, he’ll stay on as executive chairman of the board for a year before becoming non-executive board chairman, according to a February 2019 amendment to Neidorff’s employment agreement.
The agreement doesn’t detail compensation, but states that “for the remainder of his life,” Neidorff will have access to a full-time administrative assistant and an office at the company’s headquarters. During his time as chairman and for five years after, Centene will require he use the company’s aircraft for all air travel.
Longtime DaVita CEO Kent Thiry will make up to $2 million in base and bonus pay for serving as executive chairman of the company’s board for one year following his retirement, which was effective June 1. That’s a far cry from his $32 million in total compensation in 2018, but much more than DaVita’s director salaries that year, which ranged from about $323,000 to $445,000.
Thiry continues to provide counsel and is active in the company’s policy efforts to deliver integrated kidney care, DaVita spokeswoman Courtney Culpepper wrote in an email.
The difference in pay could spell problems if fellow directors protest the disparity, Reed said.
“That’s probably where it would be more favorable to have a consulting engagement,” he said.
On the other hand, directors have a legal and fiduciary responsibility to the company, McMillan said.
“The additional value the organization is getting is the duty of care that comes along with a board position,” he said.