For Howard Rohan, the adventure started in 1992, when the leadership of Samaritan Health System in Phoenix developed a plan to move the organization in a new and unexpected direction by 1997.
"I looked at the strategic plan," Rohan recalls today, "and said, `My God, our systems were built for the '50s, '60s and '70s. We can't get where we want to go with these old obsolete systems.'*"
For Rohan, Samaritan's vice president for human resources, the prospect was sobering. The organization he saw around him was a reactive, hierarchical, pyramid-shaped confederacy of independent sick-care institutions.
The strategic plan, "Think '97," demanded a proactive, flattened, team-based wellness organization in which employees could take the initiative on behalf of customers.
The challenge was to rebuild Samaritan from the inside out, to change not only how people do their work but how they relate to each other and to their customers. Ultimately the goal was to reprogram how they think.
Four years later, Samaritan has rolled out a completely renovated human resources model.
Compensation, evaluations, training, employee development, hiring, orientation, communication-all have been made over top-to-bottom for the sake of system cohesion and customer service.
Lots of hospitals and healthcare systems are experimenting with new compensation models. At St. Joseph Health System in Orange County, Calif., an analysis of rewards and recognition is part of a full human resources review. Some, like Geisinger Health Care System in Danville, Pa., are trying to use pay to deliver improved team performance. Sisters of Mercy Health System-St. Louis is developing a "worker of the future" project.
But few hospital systems have pursued the logic of their own goals so rigorously as Samaritan. "It's not just tied to (human resources)," Rohan said. "It's had a total effect on the culture, the management structure. It's had a tremendous impact on the whole organization."
MODERN HEALTHCARE spent three days at Samaritan recently to observe how the system implemented this mental inversion and to sample reaction from line managers and employees (See related story, p. 28).
By lining up performance and pay with Samaritan's strategic direction, Rohan and his brain trust hoped to create a momentum that would enhance clinical quality and outcomes, improve customer satisfaction and reduce costs.
Those were all necessities for the system to adapt to the age of payer hegemony. Phoenix, which has more than 70% managed-care penetration, is one of the meanest healthcare markets in the country. The system that fails to meet the challenge will lose patients, money, jobs and, eventually, its reason for being. With 30% market share, Samaritan has the most to lose.
In 1995 the system earned $26.1 million in net income on $1.2 billion in revenues, a 2.2% profit margin. That compares with net income of $23.3 million in 1994 on revenues of $957 million, a 2.4% margin.
To put those numbers in perspective, the American Hospital Association projects the average U.S. hospital earned 5.1% on revenues in 1995 (firm numbers aren't in yet). If Samaritan had operated at that margin, it would have earned $61 million in 1995.
To regain financial buoyancy Samaritan is trying to excise $100 million in costs over the next three years. Halting compensation creep is an essential element in that strategy.
But harmonizing a corporate culture that includes seven hospitals across Arizona, six primary-care centers, two nursing homes, 3,500 physicians and 11,000 employees, plus miscellaneous other satellite ventures, is like trying to arrange an alignment of the planets. They don't like to be pulled out of their well-worn orbits.
The brain trust. After the strategic plan was developed, Rohan & Co. re-examined Samaritan's compensation framework. They trashed the existing pay system because it was a "built-in hierarchical pyramid perpetuator." Under the old point system developed by a national compensation consulting group, rewards flowed from the resources a manager controlled, not according to results achieved.
Rohan's group then interviewed a parade of consultants. "The consultants said, `We have parts of what you want to do, but we don't know anybody who has all you want to do,'*" Rohan said. "So we decided to do it ourselves."
In 1994 Samaritan's senior leadership chartered several redesign teams to push everybody toward the new vision of an integrated healthcare system. One team addressed system infrastructure.
Eighteen people from throughout the company joined what became known as Team5. Some were staff at headquarters, some had operations backgrounds. They were chosen for their ability to think outside the box. Some, like Ellen Dean, a staff assistant for the system chief executive officer, self-selected: "The status quo drove me crazy. Let's look at something new."
The team soon discovered that pay was just the starting point, because the rest of the human resources infrastructure didn't support the new pay plan design. That's when they decided they needed to integrate pay with performance in an interdependent framework. To determine proper compensation, a way to measure performance was needed. That didn't really exist. A part of performance is how people do their jobs, including their demeanor with customers and colleagues. There was no way to evaluate these behaviors.
To attract employees who exhibited positive qualities, Samaritan had to revise selection and hiring. And when new employees started work, they had to be oriented to the entire system's needs, not just their hospital's or department's. Finally, where was Samaritan going to find managers who could inculcate in employees the skills and behaviors to make the organization flourish? Those managers would have to be developed from within. So the system needed an education and training component. And to make workers more responsive to the needs of all the people they work with, a 360-degree performance assessment was created. In such an evaluation, employees choose eight co-workers and "clients" to rate their performance on the job. That evaluation is used only for the employees' benefit and does not affect pay.
Once Team5 had worked out its enlarged program, it presented the concepts to the system's senior leaders. To the team's relief, they bought in.
Still, the group wasn't sure what kind of reception its ideas would get out in the field. Team members worked through a lot of their notions in focus groups at the various hospitals. In some places the reaction was hostile.
In the meantime the marketplace was exacting its own judgments. In October 1994 Samaritan announced that 131 management positions would be trimmed. It was a cold shower to those who had wallowed in complacency. Subsequent layoffs have been disruptive and demoralizing-so demoralizing, in fact, that Samaritan declines to give the total number of jobs lost to date for fear of alarming employees.
But the layoffs drove home the importance of reducing expenses. Healthcare, a labor-intensive industry, has a hard time reining in its salary and benefits costs. Like many other businesses, Samaritan found that merit pay tends to ratchet salaries up automatically.
At the same time, managed-care payers and government formulas are pressing reimbursements down. Admissions and lengths of stay also are riding a declining trendline.
Further, the system wanted to retool for hospital capitation, actively solicit business and eventually contract directly with employers.
"We had 800-plus exempt job titles in over 120 salary ranges," said Roger Campbell, the house compensation expert. "We wanted it to be a flexible system that could be applied to any of our business lines as we expand. We wanted something that would reward employees for value added to the organization."
Pay for performance. The compensation plan Team5 developed ties pay irrevocably to job performance. Annual performance evaluations determine raises. It works like this: Supervisors rate whether their people are "developing," "competent" or "masters" at their jobs. Those evaluations are broken down into two parts: "functional competencies" and "core competencies."
Functional competencies refer to the technical skills workers need to fulfill their assigned tasks. To reinforce that employees are responsible for their own development, functional competencies now include "initiative," "problem solving," "supervision required," "teamwork" and "customer service."
These abilities, it was thought, were necessary to help realize the system's larger goals: to let employees make more decisions at the point of service; to improve customer satisfaction; to reduce costs; and to improve clinical outcomes.
Core competencies "are the behavior portion of performance management," Samaritan's new manual says. It's how people do their jobs. Are they polite to co-workers? Respectful to patients? Do they come to work on time? Dress appropriately? Take too many sick days? Do they accept feedback constructively? Finally, in their daily actions, do they contribute to the success of Samaritan Health System?
The importance of these core competencies is being emphasized in hiring, orientation, training and development. It's an attempt to raise the internal tone of the workplace, in the expectation that it should result in a superior brand of service noticeable to the public.
Technically, core competencies are evaluated in the 360-degree process and don't affect pay. However, the new performance evaluation allows managers discretion to consider an employee's behavior in calculating a pay change.
On the performance evaluation, written by the supervisor, there is a corresponding zone of pay for each level of competence: developing, competent or master.
The biggest raises this year-6%-go to master performers who have been paid in the developing zone. The lowest raises are 3%. Some could get zero. In the future, employees whose performance doesn't measure up to their pay level will see their pay go down. "If they're not performing at an exceptional level, why should we pay them at the top of the range?" Campbell asked. "Why shouldn't they be paid at market?"
This is where the cost-control rubber meets the road. "Over the long term, your pay should not stagnate," Campbell said. "It should be dynamic, up or down, depending on performance."
Likewise, if you were a master performer in your old job and take a new job to build your resume or to broaden your experience, your pay could decline if the new job has the same salary range but you're not a master at it yet.
Or you could be a master performer and still not get a raise if you're already paid more than the maximum for your job's pay range.
Isn't that a little hard on people who perhaps have given Samaritan the best years of their working lives, and who are now being amply rewarded? "It is tough," Dean averred. "But you know what? This is a tough world. And this is a tough environment. What do we do? Go down, for the sake of a few employees? We've got to survive here."
Costs of demystification. In 1995, the transition year to the new pay system, Samaritan didn't increase base pay but gave lump-sum awards. This year, for the first time, managers are using the new pay guidelines to reward employees for their skills and contributions to the system. Or, in some cases, to give them nothing if they failed to meet the expectations of their jobs.
Reaction has been all over the map. Focus groups revealed that "employees who really humped didn't like getting the same raises as people who don't do their job as well," said Jerri Edge, system director of employee relations and a Team5 participant. The eager beavers are happy to see more variation in rewards.
Others are unhappy that they will be docked pay for not living up to a standard they think is unrealistic.
And still others, having eaten from the tree of knowledge, have found their Eden elsewhere.
"At Desert Samaritan (Medical Center) we've had an all-out upheaval, mostly in the nursing area" Edge said. Competition for nurses is fierce on the east side of the Phoenix area. The population is growing and other hospitals are expanding, she said. "They can cherry-pick a trauma nurse from Desert. They are merciless," she said. Good Samaritan Regional Medical Center and Desert Samaritan already have lost eight to 10 nurses that way.
The nurses are leaving because they just discovered that by Samaritan's own reckoning, they are underpaid. Under the revised paradigm, these nurses were evaluated as master performers, but their salaries registered at the low end of the pay zone. In the next breath, Samaritan informed them it couldn't afford to lift all their salaries to market level at once because it would bust the system's budget.
"Samaritan tells them they should be getting $2 an hour more," Edge explained. "Samaritan can only give them $1.10 an hour more. So they find another job at $3 an hour more. And they take it. They think, well, those people value me more."
It puts Samaritan's nurse managers in a quandary. To maintain the pay program's integrity, they aren't allowed to raise wages to retain their staff or recruit replacements.
"We said we're going to take the mystery out of compensation," Edge said ruefully. "And we did."
Managers' prerogative. In some ways, the pay-for-performance regimen has been hardest on managers. They are the ones who have to interpret and implement these abstractions on the retail level.
Managers themselves, as exempt employees, are subject to the same evaluative process as their subordinates, only with higher expectations for performance. In addition to everything else, managers are graded on their leadership skills and how well they inspire their people to take initiative.
Managers first had to learn the new lingo. "If the goal is flattening the organization, you cannot use a command-and-control management structure any more," said Dan Green, vice president for system development and a Team5 member. Unless Samaritan could change its leadership style from "do this, do that" to team-based coaching, mentoring and supporting, the corporate culture wouldn't budge.
"For the first time ever, we have articulated what leadership means in this organization," Green said. "You have to empower people. You have to trust them."
And the main point, very hard for managers to handle: The boss is not the customer any more. From now on, the covered life is the customer. Everyone in Samaritan is expected to act accordingly.
Managers find their new responsibilities very time consuming. Worse, they have to be able to tell people frankly that they aren't going to get a raise because their performance isn't good enough.
"If they can't do that, we're in big trouble," said Dede Schmallen, director of work force development. "The integrity of this process rests with managers." Cost modeling of the new compensation plan uses a bell curve. The "developing" and "master" pay zones are at the outside ends, and the vast majority of "competent" people are in the middle. "The wild card is how much all this will cost. We have no way of predicting how managers will assess their staff," Schmallen said.
Yet Chuck Berry, system director of pharmacy services, was surprised how easily employees grasped the new setup. He told his people: "You could be here (on pay), except for this (on performance). If you can improve this, you could go there."
Now, the manager can put the ball in the subordinate's court. By writing an "action plan," it's the worker's responsibility to figure out how he or she is going to improve his skills or her attitude, and to demonstrate to the manager that progress is being made.
"This is hard for managers in healthcare because we've been paternalistic, maternalistic managers for so long," Berry said. "It's the way we take care of patients. `Just lie down, we know what's best for you."'
The new evaluation and compensation process lays out the employees' financial future in front of them and suggests how to do something about it.
"It emphasizes the attitudes and behaviors with which the employee must approach the job," Berry said. "Customer service and teamwork are now part of the developing functional competency....I've had employees that have cleaned up their act within a month after the assessment."
Sharon Larson, a food service supervisor at Maryvale Samaritan Medical Center, has had the same experience. "It turned on a lot of lights for people. They know they can't just show up for work any more," she said.
Larson has seen the effects of the first evaluation on people's work-and their behavior. They realize, "`I can't go on being nasty to people. It's going to affect my pay,"' she said. "As far as attendance, conduct and dress, (in the old days) that would be in the performance appraisal but it didn't affect their wages. Now, we can put a hold on it. All of a sudden, attendance is important."
To keep managers from going too easy on their people, no employee can be judged a master performer without a second signature, by the department director, on the form. That's Samaritan's only leverage to keep managers from gaming the system. So far the pharmacy department has evaluated 35% of its work force. "I was surprised," Berry remarked. "The bell-shaped curve is there."
The long haul. No one can say for sure whether the pay system will work or whether the global human resources strategy will renovate Samaritan as intended. The rollout has gone reasonably well, Team5 members believe, and folks out in the system seem to be getting it.
"We won't know how successful we are until at least the end of 1997," when, for the first time, people whose performance has failed to improve will be docked pay, said Molly Winkler, one of the Team5 members who devised the pay program. When that happens, "it's going to send a wave through the organization. The other option is, an assessment is done that is poor and there is no decrease in pay. Then the message will be, `OK, business as usual."'
Despite months of focus groups and alpha testing, some aspects of the plan curdled rather than gelled. A variable-pay component, deemed critically important by Team5, had to be scrapped after employees raised issues of fairness, access and credibility. "We wanted an individual variable-pay award, a team variable-pay award, and perhaps a system variable-pay award," Campbell said. "We want those things to be integrated and cohesive, along with the person's base pay. We decided it needed further study. And you need the funds for it. Money is very tight this year."
All along, Team5 members knew that a failure to communicate their ideas to managers and employees would doom all their efforts. Yet midway through they had to rewrite the whole communications plan. They discovered they were saying the wrong things. And there's a lot of skepticism and grumbling, especially among veteran employees, that the pay-for-performance concept is designed to drive them out of their jobs.
Yet the system leadership hasn't wavered in its support for the project. No alternative has presented itself, and to do nothing is not an option.
As if to reinforce that point, the layoffs have not abated. In June another 250 positions were eliminated, of which 170 were occupied. That and other measures should save about $21 million this year, executives said.
When Samaritan started this process, people assumed that as long as the doors were open, the patients would come. Why wouldn't they? Employees were "naive, uninformed and uninterested" about changes in the market around them, Ellen Dean said.
But recently they have started to understand the element of risk. In certain outpatient departments, people have made the synaptic leap from the loss of a managed-care contract, to fewer patients coming through the door, to less revenue, to the potential elimination of jobs.
Can the system afford the new compensation model? If everybody follows the incentives and progresses to master performer, can Samaritan really make good on its promise?
The brain trust thinks it can. Using pay as a lever, the new ethos should sink in, and more customers should be satisfied in their dealings with Samaritan. It should attract more business.
"The Phelps Dodges, the Motorolas-if they get good feedback they're going to want to contract with our HMOs," said Team5 member Mike Quinn. "And quality of care will go up. It's not just all economic."
Susan Sawke, a system planner, concurred. "You can't look at it in isolation," she said. "Will we pay them more? Yes, we have committed to that." But more important, "we also expect it will change the organization in ways we can't comprehend yet."