One of the constants of healthcare: Rising executive pay

https://www.modernhealthcare.com/executive-compensation/one-constants-healthcare-rising-executive-pay?utm_source=modern-healthcare-daily-dose-wednesday&utm_medium=email&utm_campaign=20190807&utm_content=article4-readmore

Average total cash compensation for health system executives rose 6.5% from 2018 to 2019, extending a consistent rise in executive pay that governance experts do not expect to slow.

Annual and long-term performance-based incentives have driven pay hikes of 4% to 7% each of the last four years, according to Modern Healthcare’s annual Executive Compensation Survey. Health systems’ ongoing expansions coupled with a highly competitive executive market will continue to drive up their base salaries and bonuses, experts said. But this dynamic is drawing ire from rank-and-file employees who aren’t happy with their pay and from consumers who are spending more on their care. It is also spurring new legislation.

Nevertheless, with baby boomers retiring in large numbers and demand soaring, the pay hikes aren’t going away anytime soon. “Healthcare organizations are becoming more complex and leadership skills are evolving,” which often translates to higher pay, said Bruce Greenblatt, a managing principal at SullivanCotter, the compensation consulting firm that has supplied data for Modern Healthcare’s annual surveys since 2003.

“Qualified talent is in short supply, which requires a deliberate approach to talent strategy as new roles emerge and new responsibilities unfold,” he said.

Providers look to select metrics and targets that will shape their organization for years to come. In doing so, they toe a delicate line ensuring their bonuses are attainable to keep executives engaged while not making them out of reach and damaging morale.

With more pay based on performance, there’s greater risk of poor program design, said Steve Sullivan, a managing director at executive compensation consulting firm Pearl Meyer. If you make a mistake, there is a lot of money on the line, he said.

“You don’t want to have giveaways and you don’t want to have plans so egregiously hard that they never have payouts because executives will disengage from the program,” Sullivan said. “You have to strike a balance between responsible compensation and something that is motivating and incenting.”

Larger systems paying more

Health system executives’ average base salaries increased 4.2% and ticked up even higher among organizations with more than $3 billion in revenue based in high-cost cities, according to Modern Healthcare’s 39th Executive Compensation Survey, made up of data aggregated from 1,149 hospitals and 401 health systems. System CEOs earned an average total cash compensation of $1.4 million in 2019, a 6.3% increase.

Executives who saw the highest total cash compensation hikes of 6.6% up to 13.3% were business development officers, administrative officers, internal audit executives, chief financial officers, planning executives, reimbursement executives, chief nursing officers, chief human resources officers and chief operating officers.

Incentives are typically tiered with a minimum threshold, a target and a stretch goal. They are often based on quality, safety and patient experience as well as financial performance. They may be related to ambulatory market share, employee and patient engagement, facilitating access to capital, bolstering physician alignment, inking successful joint partnerships and mergers, emergency department wait times and utilization, population health, shared risk, readmissions, hospital-acquired infections and length of stay, among other metrics.

The types of incentives offered are heavily dependent on the provider and the market. Some hospitals and health systems have stuck to the more traditional financial and market-share-based measurements, while more progressive organizations are targeting outcomes.

The bonuses differ based on short- and long-term goals, the latter becoming more prominent in recent years as boards and compensation committees emphasize the entire organization’s performance. Sometimes there is a trigger, such as operating margin, where executives miss out on all bonuses if it isn’t reached. For instance, Mercy Health, which is now Bon Secours Mercy Health, did not pay executives an incentive in 2016 since the system did not reach its incentive thresholds, the Cincinnati-based Catholic health system said.

“You want to make sure everyone is rolling in the right direction,” said Tom Giella, chairman of healthcare services for executive recruiter Korn Ferry. “You want to do what is right for the system, not an individual hospital or inpatient versus outpatient. It creates an incentive for everyone to work together.”

But even if the baseline isn’t reached, there typically isn’t a penalty, experts said. It will only lower their earning potential. “In some industries there can be a negative adjustment,” Sullivan said. “I haven’t seen that in healthcare. In healthcare, if there is a modifier it is going to be positive.”

Long-term view

Nearly half of larger health systems surveyed report using long-term incentive plans.

Dignity Health said a “substantial portion” of executive compensation is linked to organizational performance related to key clinical-quality and patient-satisfaction measures as well as community health investments and financial performance. Similarly, Kaiser Permanente said a third to half of pay is based on performance, linked to membership growth, expenses, operating income, and clinical and service quality improvements. Bon Secours Mercy said each of its employees are rewarded under the same incentive program, which includes quality, growth, financial and community benefit targets.

More providers are using deferred compensation programs, which can amount to hefty payouts at the end of an executive’s tenure.

In a related Modern Healthcare analysis of more than 2,000 not-for-profit hospitals, the 25 highest-paid not-for-profit health system executives received a combined 33.2% increase in total compensation in 2017, as their compensation rose to $197.9 million from $148.6 million in 2016.

The pay increases have spawned rallies and protests from more than 1,000 employees at Beaumont Health and Providence St. Joseph Health, both of which had chief executives in the top 25. Beaumont and Providence said in prepared statements that their CEO pay are not outliers compared to their peers.

California policymakers introduced a bill, recently passed by a state Senate subcommittee, that aims to boost not-for-profit health systems’ public disclosure requirements for executives’ deferred compensation.

“What surprises people I think as compensation becomes very generous because it is a competitive market, some think a hospital administrator shouldn’t expect to make more than the average physician,” said Paul Keckley, an industry consultant and managing editor of the Keckley Report. “Those days are long gone.”

Executives’ pay along with their respective C-suites are growing as health systems expand. New C-suite positions in 2019 included reimbursement executive, communications executive, academic affairs executive and operations executive, according to SullivanCotter’s data.

Physician leaders continue to be in high demand as providers look to influence clinical delivery redesign, population heath activities and quality improvement, said Tom Pavlik, a managing principal at SullivanCotter. Administrative roles in finance, consumer experience, IT, marketing and human resources are being filled by healthcare industry outsiders, he said.

“There is a lot of change as organizations are realigning to be operationally efficient and integrate clinical care delivery,” Pavlik said.

Among hospital executives, average base salaries rose 3.7% for hospitals that exceeded $300 million in revenue compared to 3.2% for smaller facilities. System-owned hospitals saw slightly lower base salary hikes than independent ones.

Average total compensation increased 5.3%, while CEOs of independent hospitals took home the highest raises at 9.2%, followed by chief financial officers of independent hospitals (6.5%), chief operating officers of system-owned hospitals (5.8%) and chief financial officers of system-owned hospitals (5.3%). Independent hospital CEOs earned an average of $758,300.

Providers rely on third-party consultants for accurate portrayals of market-based compensation reports that inform their compensation structures. But some of Pearl Meyer’s prospective clients are concerned about how their current adviser is interpreting the market, Sullivan said.

“With all the M&A, you have to create larger peer groups to generate a bigger sample,” he said.

This is a relatively new dynamic as the number of megasystems have swelled, Giella said.

“There is a war for talent and a big demand as systems have amalgamated so quickly,” he said. “They are getting through these growing pains where they have never dealt with this scale before, so it’s hard to look at historical trends. It’s very fluid so it’s hard to tell if you are paying someone fair compensation.”

One of Keckley’s regional health system clients told him that they are trying to figure out the most efficient and lean model.

“When I asked him what is keeping him awake, he said, ‘I want to be sure we are market-focused and that we are not just busy moving the deck chairs around.’ ”

DATA: Executive Compensation: 2019

 

 

 

Has Community Health Systems Finally Bottomed Out?

https://www.healthleadersmedia.com/strategy/has-community-health-systems-finally-bottomed-out

After selling more than 80 hospitals in three years, leaders of the large for-profit hospital operator are suggesting the worst may be behind them.


KEY TAKEAWAYS

The troubled operator of rural hospitals is focusing now on growth-oriented markets.

The latest round of questions and accusations adds to the tumultuous past five years.

Some analysts say CHS isn’t poised for where the market is headed: outpatient services and value-based care.

Times have been tough for Community Health Systems Chairman and CEO Wayne T. Smith, who is voicing an optimistic message this year as the hospital operator continues to navigate choppy waters.

Smith and fellow CHS senior executives told investors this month that the company expects to complete its massive and long-running divestiture plan by the end of 2019, having already shed 81 hospitals from its portfolio in the three preceding years. The company, based in Franklin, Tennessee, operated 106 hospitals across 18 states as of the end of the first quarter.

While the divestitures give CHS cash to pay down its debt, they are also part of a strategic effort to align CHS operations with the geographic areas where the company sees the greatest growth potential, Smith said.


“This has allowed the company to shift more of our resources to more sustainable markets, ones with better population growth, better economic growth, and lower unemployment, which provides us an opportunity for sustainable growth,” Smith said during the first-quarter earnings call this month.

“As we complete additional divestitures, we expect our same-store metrics to further improve,” he added. “This will lead to not only additional debt reduction but also better cash flow performance and lower leverage ratios.”

Executive Vice President and Chief Financial Officer Thomas J. Aaron echoed that message at the Goldman Sachs Leveraged Finance Conference this month. While CHS was truly a rural hospital company 15 years ago, Aaron said the post-selloff organization is investing strategically in markets where it anticipates growth.

“We’d rather compete in a growing pie than have more market share in a pie that’s shrinking,” Aaron said.

“We feel like we’re well-positioned,” he said.

But the positive forecast is a bit of a tough sell, especially when you consider how bad the past five years have been:

  • Questionable HMA Acquisition: In 2014, CHS completed its $7.6 billion acquisition of Florida-based hospital operator Health Management Associates, Inc. (HMA), in what is widely viewed in hindsight as a bad move. In addition to a $260 million settlement with the U.S. Department of Justice, a subsidiary of HMA pleaded guilty to criminal fraud last year for alleged misconduct that predated the acquisition by CHS—allegations that Smith knew about before the deal was final. “We were aware of the issues they had,” Aaron said this month. “We went ahead and closed on the transaction, confident that we could get the cost synergy, and we felt like they had some great assets.”
  • Major Stock Market Woes: In 2015, the price of CHS shares peaked at nearly $53 apiece, according to New York Stock Exchange data. But by the end of that year, shares had lost more than half of that value. Share prices continued to slide the following year and haven’t made a meaningful recovery since. They have been trading below $5 so far this year.
  • Lackluster Quorum Spin-off: In 2016, CHS spun off 38 hospitals to form Quorum Health Corporation. The spin-off severely underperformed expectations, and investors began asking questions. Quorum formally responded to those investors with a letter that acknowledged several reasons to question the “operational competence” of CHS leaders who backed the spin-off. A related dispute between Quorum and CHS ended in arbitration earlier this year.
  • Ongoing Hospital Divestitures: In 2017, CHS sold 30 hospitals, followed by another 13 hospitals in 2018, Aaron said. So far this year, CHS has announced the sale of at least seven more: one in Tennessee, two in Florida, and four in South Carolina. A spokesperson for CHS did not respond to HealthLeaders‘ request for additional information and comment.
  • Recurring Bankruptcy Questions: Industry analysts have wondered for years whether bankruptcy may be on the horizon for CHS. Those questions were renewed again this month when Ryan Heslop, a portfolio manager for Firefly Value Partners LP, took a short position against the company and said a CHS bankruptcy is likely in the next few years, as Reuters reported. About that same time, Smith invested more than $3 million in CHS stock, according to two Securities and Exchange Commission filings. (Smith, 73, who has been CEO for 22 years, now directly and indirectly controls about 2.8% of the company, as the Nashville Post reported.)
  • Call for CEO’s Ouster: With the release of a report this month titled “Other People’s Money,” the National Nurses United (NNU) group accused Smith of squandering CHS’ assets and called for him to be removed. “The fact that Smith remains at CHS’ helm, given a series of fatal calculations that set the company on a downward spiral, is a real wonder,” the NNU report states. Shareholders, however, voted overwhelmingly in favor of keeping Smith as a director and significantly increasing his incentive plan compensation, according to SEC filings.

Despite the light-at-the-end-of-the-tunnel rhetoric coming from CHS executives, there’s still real concern the company could come undone. That’s because CHS’ problems run deeper than its balance sheets, says Mark Cherry, MFA, a principal analyst at Market Access Insights for Decision Resources Group.

“Given the national trend toward provider consolidation, CHS might not remain intact even if it were financially healthy,” Cherry tells HealthLeaders in an email, adding that CHS seems to be unsuited for the industry’s ongoing shifts toward value-based payments and outpatient care delivery.

“There are only a few markets, like Scranton, Knoxville, and Northwest Arkansas, where CHS has enough presence to act as a stand-alone health system that can influence physician and patient behaviors,” Cherry says.

The structural problem is rooted in a bad strategic bet a decade ago, Cherry says.

“As markets and regions were coalescing around large integrated delivery networks focused on value-based care, CHS continued to invest in suburban facilities and demand high fee-for-service reimbursement,” Cherry says.

“Whereas operating a couple of suburban hospitals within a larger market once gave CHS access to better insured patients and leverage against payers who wanted to offer broad provider networks, the post-ACA landscape does not have as wide a uninsured discrepancy between urban and suburban areas,” he adds, “and payers are shifting to high-performance narrow networks, allowing them to cut CHS facilities out entirely if they are unwilling to compromise.