- While CFOs, on the whole, remain optimistic about an economic rebound this year, they’re concerned about labor availability and accompanying cost pressures, according to a quarterly survey by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.
- Over 75% of CFOs included in the survey said their companies faced challenges in finding workers. More than half of that group also said worker shortage reduced their revenue—especially for small businesses. The survey panel includes 969 CFOs across the U.S.
- “CFOs expect revenue and employment to rise notably through the rest of 2021,” Sonya Ravindranath Waddell, VP and economist at the Federal Reserve Bank of Richmond said. “[But] over a third of firms anticipated worker shortages to reduce revenue potential in the year.”
As many companies struggle to find employees and meet renewed product demand, it’s unsurprising CFOs anticipate both cost and price increases, Waddell said.
About four out of five CFO respondents reported larger-than-normal cost increases at their firms, which they expect will last for several more months. They anticipate the bulk of these cost increases will be passed along to the consumer, translating into higher-priced services.
Despite labor concerns, CFOs are reporting higher optimism than last quarter, ranking their optimism at 74.9 on a scale of zero to 100, a 1.7 jump. They rated their optimism towards the overall U.S. economy at an average of 69 out of 100, a 1.3 increase over last quarter.
For many CFOs, revenue has dipped below 2019 levels due to worker shortage, and in some cases, material shortages, Waddell told Fortune last week. Even so, spending is on the rise, which respondents chalked up to a reopening economy.
“Our calculations indicate that, if we extrapolate from the CFO survey results, the labor shortage has reduced revenues across the country by 2.1%,” Waddell added. “In 2019, we didn’t face [the] conundrum of nine million vacancies combined with nine million unemployed workers.”
Consumer prices have jumped 5.4% over the past year, a U.S. Department of Labor report from last week found; a Fortune report found that to be the largest 12-month inflation spike since the Great Recession in 2008.
To reduce the need for labor amid the shortage, many companies will be “surviving with just some compressed margins for a while, or turning to automation,” Waddell said.
“Talent management deserves as much focus as financial capital management in corporations.”
~ Jack Welch
One of the best ways to strengthen your company as a whole is to devote attention to developing your employee talent. If your staff isn’t given the proper encouragement or assistance needed to help them move forward within your company, it can be more challenging for the company itself to continue growing in its capabilities. There are several ways that you, as a leader, can help to develop the talent at your company. Talent identification and management begin with The Four P’s.
- Pinpoint individual strengths
While specific roles at any company often require a specific set of skills, your employees will likely have additional strengths within those skill sets that can be utilized and honed whenever possible. Assess your staff in order to pinpoint each employee’s individual talents and areas of expertise, then find ways to incorporate those abilities into their daily workflow. This will not only make employees stronger contributors to your team, but will also likely provide them with greater job satisfaction, as they’ll be performing tasks using skills that can bring greater value to their team’s output.
- Practice engaging leadership
Truly great leaders possess characteristics that encourage and inspire their staff. In order to bring yourself to a higher level of greatness as a leader, explore your existing strengths and see how you might be able to improve upon them and add new motivational elements into your leadership style. Above all, be a leader who provides adequate support for your team. Regularly engage with each of your employees and ensure their needs are being met so they can be better equipped to perform their jobs at an optimized level.
- Prioritize talent management
Another way to ensure the continued development of your staff is to incorporate effective talent identification and management tools and practices into your business structure. A human capital management solution, for example, can have modules specifically geared toward optimizing your talent management practices. These kinds of software services can simplify the creation of career development plans for your current talent and improve your ability to monitor their progress throughout them. These tools can also automate components of your recruiting operations, like sending out application notifications, in order to speed up the process of cultivating and developing new talent alongside seasoned employees. By improving your company’s talent management practices, you may find it easier to determine what additional steps you can take to aid your employees in continuing to grow.
- Provide opportunities for growth
In order to truly develop into more skilled and knowledgeable employees, your staff must be provided with opportunities to exercise their own leadership and to strengthen skills that might be important in the roles they aspire to. Sit down with individual team members and help them set work performance goals for themselves. Once they’ve established concrete, attainable goals for both the short and long terms, do what you can to aid them in achieving their objectives each step of the way.
- Pinpoint individual strengths
For instance, if one of their goals is to expand their understanding of the daily responsibilities of your company’s executive team, create an opportunity for them to shadow you or another company leader so they can gain insight into whether an executive career path could be a good fit for them. The more your employees are able to broaden their comprehension of your company’s functionality beyond their own duties, the greater the likelihood that they’ll be able to develop into well-informed and well-rounded contributors.
Next time you recruit someone amazing to your business, only to have that person leave for a bigger opportunity elsewhere, think about Nick Saban.
Saban, the head football coach at the University of Alabama, is considered one of the greatest college coaches of all time. His teams have won six national championships — five at Alabama and one at Louisiana State University — tied with another Alabama coaching legend, Bear Bryant, for most in college football history.
Now, he’s getting credit for a statistic that might seem a mixed blessing, but one that great leaders will recognize as a compliment: Saban’s teams endure (or maybe “enjoy”) near-constant churn among his assistant coaches. As the Wall Street Journal pointed out on Sunday, not a single on-field assistant coach from Alabama’s national championship victory in 2017 remains on the team today.
Thirty-eight assistants have moved on since 2007. Most of them leave for jobs with higher profiles or more responsibility elsewhere. Last year, USA Today calculated that there were 15 former Saban assistants in head coaching jobs in either the NFL or college football. Add another to that list: Michael Locksley left Alabama earlier this year to become the head coach at the University of Maryland.
As a head coach, and a coaching recruiter, Saban says he’s only interested in assistants that he believes will be very successful — making it unsurprising to him that they’re later recruited away from him.
“I think if you look at most of the coming and going, it’s people getting better jobs,” he told the Journal. “I actually look for people who have goals and aspirations, who are hard workers and very committed to what they do. So people sometimes favor hiring guys that have been in this program.”
The constant churn arguably drives innovation, too. New assistant coaches have the chance to advocate for new strategies. That makes it harder for opposing teams to predict what Alabama will do on the field.
There’s a saying: Good leaders attract followers; great leaders create more leaders.
If that’s true, then count Saban as a leader with an example worth learning from, no matter what your business or calling may be. Feel better about losing your top people when it happens. It’s inevitable if you’re a great leader.
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.
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.”
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.”
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.’ ”
In a recent survey of healthcare leaders, most were confident about their own organizations going into the new year. But respondents expressed concern about a range of evolving industry-wide challenges, including costs, technology and talent.
A majority of US healthcare executives surveyed by J.P. Morgan said they were optimistic about the financial performance of their own organizations going into 2019, as well as the national and local economies. But most were less positive about the outlook for the industry as a whole, with 28 percent expressing pessimism and another 31 percent merely neutral.
Respondents to the survey, conducted Oct. 16 to Nov. 2 of 2018, said their biggest concerns were revenue growth, rising expenses and labor costs. The executives said their organizations plan to invest the most in information technology and physician recruitment.
Healthcare Changes Shape Perceptions
The pessimism about the industry likely stems, in part, from regulatory uncertainty and an ongoing shift from a fee-for-service model toward a value-based payment system, said Will Williams, Senior Healthcare Industry Executive within J.P. Morgan’s Commercial Banking Healthcare group. “Healthcare is going through the most transition of any industry in the country right now,” he said. Amid this upheaval, healthcare organizations face a combination of challenges, including lower reimbursement rates for Medicaid and Medicare patients, increased competition, and higher costs for labor, pharmaceuticals and technology investments.
The optimism that executives feel about their own hospital or healthcare group may come from a sense that an individual organization can adapt to industry changes, said Jenny Edwards, Commercial Banker in the healthcare practice at J.P. Morgan. “You can control certain factors, and make adjustments to compensate for the headwinds.”
Biggest Challenges for the New Year
For 61 percent of respondents, the focus is on attracting new patients, followed by expanding target markets or lines of business (53 percent), and expanding or diversifying product and service offerings (44 percent). Hospitals, for example, have worked to add more patients to their broader healthcare system by opening clinics for urgent care or physical therapy, Edwards said.
As patient habits change, hospital systems have needed to become more consumer-focused, Edwards said. Patients are more likely to shop around for their care, expect transparent pricing and review healthcare workers on social media sites. This “retail-ization” trend in healthcare is accelerating, Edwards said. “You can shop for healthcare like you would a new pair of jeans.”
Skilled Talent Wanted
The talent shortage is top of mind for many healthcare executives, with 92 percent of survey respondents saying they were at least somewhat concerned with finding candidates with the right skill set. For 35 percent of respondents, the talent shortage is one of their top three challenges.
For those respondents who expressed concern, the most difficulty arises in filling positions for physicians (52 percent) and nurses (46 percent). To address the challenge, 76 percent said they expect to increase compensation of their staff over the next 12 months. According to 37 percent of respondents, the talent pool’s high compensation expectations factor into the shortage.
Most Challenging Positions to Fill
The talent shortage is an issue across the industry, Williams said, and burnout among doctors and nurses presents an ongoing problem. One contributing cause could be evolving changes in daily practice, with considerably more time today spent on electronic medical record entries and less on patient care. Williams said, “Doctors are getting frustrated. The problem is trying to replace those doctors as they quit practicing.”
Healthcare executives are particularly concerned about shortages of primary care professionals. “Rural communities already have these shortages,” said Brendan Corrigan, Vice Chair of the J.P. Morgan Healthcare Council.
Labor costs tend to be higher in healthcare than in other sectors, Williams said, as a hospital must have coverage for all of its major roles 24 hours a day. When asked where they struggle with workforce management, the survey respondents cite staff turnover and its associated cost (47 percent), the ability to flex staff based on patient volumes (41 percent), and the cost of overtime and premium labor (36 percent). These workforce issues not only represent specific challenges; they all contribute to labor costs, which, as noted above, rank in the top three challenges for 2019.
Investments for a Changing Industry
A majority (51 percent) of organizations plan to invest in IT over the next 12 months. Other areas for investment included physician recruitment (44 percent) and new or replacement facilities (36 percent).
Since healthcare organizations manage a large amount of private patient health information, data security remains a large part of IT expenditures. “It’s a huge focus—they’re spending a lot of time and money on preventing a breach,” Edwards said. She goes on to note that the transition to patient EMR systems brings another big IT expense—more than $1 billion for the largest healthcare systems.
Overall, the survey showed healthcare executives grappling with rising costs and structural changes that affect the entire industry. “Healthcare is trying to figure out how to fix themselves,” Williams said.
Faced with slim margins and rising costs, the healthcare industry is looking to blockchain, data analytics and innovation to help drive savings and unlock new revenue.
The healthcare industry is facing an urgent need to reduce costs and increase revenue. Research from the Healthcare Advisory Council reveals the not-for-profit health system will need between $40 million and $44 million annually in cost avoidance over the next eight years to maintain a sustainable margin. The challenge is significant, but emerging technologies and innovative strategies are creating opportunities for greater efficiency, better patient care and decreased costs, according to executives and other leaders in healthcare.
Making a Margin on Medicare
Health systems with the best margin sustainability pursue effective cost-avoidance practices, including:
- Embedding cost discipline throughout the organization
- Escalating spending decisions
- Reducing unnecessary hires
- Matching patient acuity to the level of care
- Reducing drug formulary costs
But even with these practices, cost avoidance is challenging—particularly when it comes to Medicare-reliant seniors, who often require frequent medical treatments and hospital admissions. Turning to advanced electronic medical records (EMRs) that are designed around a health system’s risk and workflow can improve treatment decisions and continuity of care, leading to decreased admissions, better cost effectiveness and a greater profit margin.
Simultaneously, some health systems are looking to a pre-paid, value-based medicine model, as opposed to the more common fee-for-service model. Value-based medicine moves the payment upstream, incentivizing providers to focus on maintaining patient health rather than on providing medical interventions. Decreasing the amount of care needed to keep patients healthy has a direct impact on the size of an organization’s margins.
Blockchain: The Potential to Change Healthcare
One of the most common inefficiencies in healthcare is how physicians are credentialed. The months-long process for clinician credentialing commands significant time and costs. Emerging blockchain technology may be one solution to this persistent point of inefficiency.
With blockchain, rather than sending a clinician credentialing application to several organizations for verification, the physician and all credentialing locations—as members of a dedicated blockchain network—can have access to the physician’s highly encrypted log. Any changes to the physician’s log can be transmitted to the network and validated by private keys known only to each party and with algorithms agreed upon by the network. In this, trust transfers from a third-party clearinghouse to the network as a whole.
In the blockchain world, the physician could provide access codes to the hospital to review their verified credentials. This could save as much as 80 percent of the current cost and time invested in physician credentialing. Using the same technology and process, blockchain may also be a valuable tool for finding efficiencies when working with patient records.
Venture Capital: Strategic Investing 2.0
Healthcare system-based venture capital funds are growing rapidly. In 2017, more than 150 distinct corporate venture groups operated within the healthcare arena, according to Health Enterprise Partners, and these groups participated in 38 percent of all healthcare IT financing.
There are four common objectives for starting such a fund:
- Generate new income sources not subject to healthcare reimbursement pressure
- Identify promising companies that executives might not otherwise encounter
- Create a vehicle to enhance brand integrity and expand market reach
- Foster a culture of innovation
Once healthcare investors establish their fund objectives (or mix of objectives), they define their investment approach. This includes establishing a decision-making chain with operational leaders and board members that can allow decisions to be made quickly and in an established pattern. It also includes building infrastructure and could mean adopting a rigorous information environment system, like a healthcare customer relationship management (CRM) system, as well as developing stringent custody and accounting procedures for securities.
Funds should gather resources to support the interactions between the investment fund and the companies in which they invest. At the outset, they should decide the relationship they will have with their investment targets and whether return on investment is a primary or secondary goal. As a part of choosing investment targets, it is important that funds address an important problem of the parent organization and in a way that the organization supports.
Time Is Money: Accelerating the Pace of Care
For health systems, every patient hour costs $250 in direct operating costs, more than half of which owe to labor. By this, improving efficiency and decreasing the time needed for tasks can save money and support a healthy margin. A mix of advanced analytical data and targeted interpersonal relations can help reduce the time required for common hospital and health system tasks. Predictive analytic modeling software can help yield clearer insight into operations, revealing ways to break down barriers between departments and more effectively manage census levels. This optimizes census distribution inside a complex medical center.
Another rich source of potential healthcare savings lies in the staff hiring process. Successful staff hiring for all income levels is one of the great challenges for health systems, but data analytics can help make the hiring process more efficient. With models built on the characteristics of successful hires, predictive analytics can point to applicants with the best potential for success, improving confidence in hiring decisions. Importantly, while analytics and automation can play a big part in finding the best applicants, once a candidate becomes an employee, important decisions like promotions or relocations require direct personal contact.
Data and Dollars Innovation
As health systems explore avenues for increased efficiency, lower costs and better margins, J.P. Morgan has developed digital innovations to support healthcare investment, strategy and operation. Two of the most applicable include:
- Enhanced Healthcare Lockbox: J.P. Morgan has supercharged its lockbox technology with machine learning. The auto-posting rate has increased by nearly one-fifth, allowing hospitals and health systems to redeploy assets to other revenue-generating sectors like denial management. The high-tech upgrade has also saved three to four days in clients’ working capital.
- Corporate Quick Pay: The need for hospitals and health systems to collect an increasing amount of money directly from patients has resulted in an explosion in low-dollar patient refunds. This creates a problem for the accounts payable departments of healthcare institutions, which were not designed to issue thousands of small checks to patients. J.P. Morgan’s Corporate Quick Pay solution allows health systems to send payments directly to a patient’s bank account using email or text message.
These innovations in artificial intelligence and machine learning drive efficiency across a range of areas. Consider the benefits one client enjoyed by virtue of J.P. Morgan’s digital tools:
- 70,000 paper-based claims converted to electronic
- 99.3 percent lift rate for all paper received in lockbox
- 18 percent increase in auto-posting after implementation
- Three to four days’ improvement to working capital
Going forward, emerging technologies and strategies are indispensable for healthcare systems striving to grow margins in a time when health costs and needs are increasing. Ultimately, hospitals and health systems that find pathways to greater profitability will be best positioned to achieve their primary goal: delivering better care that leads to better patient outcomes.