Payday for payers

Who says pay for performance hasn't swept through the healthcare industry yet? While it may not describe reimbursing providers for outcomes, it does describe the relationship between the top executives of publicly traded healthcare companies and their respective companies' financial performance.

Despite last year's uncertainty regarding the future of the Patient Protection and Affordable Care Act, healthcare industry leaders took home more money than those in any other sector on the Standard & Poor's 500. Healthcare executives in the index earned a median total pay of $10.8 million, the highest of any other sector, according to research from Equilar, an executive compensation data firm. That represented a 3.8% increase over 2010.

Within the healthcare industry, there was significant variation: Compensation packages for CEOs of investor-owned hospital chains, for example, took a hit last year, as hospital stocks were battered amid the federal debt-ceiling crisis and concerns about a potential fallout that could affect Medicare spending.

Insurers, in contrast, had a somewhat brighter run in the stock market, and executive compensation packages in the sector seemed to reflect that optimism. Leaders of for-profit long-term and specialty-care providers also managed to rake in salary gains despite a more measured performance on Wall Street.

Modern Healthcare's annual report on executive compensation looks at compensation packages for CEOs at the 10 largest companies, based on net revenue, in three sectors—hospital, insurers and specialty care. The data was compiled from annual stock exchange filings with the U.S. Securities and Exchange Commission. The list excluded companies that primarily provide skilled-nursing or assisted-living services.

Annual compensation included base salary, bonuses, restricted stock grants and changes in pension and deferred contribution plans as disclosed in a company's annual report or proxy filings. The list is a ranking of realized pay—it excludes option awards; total compensation is calculated as the sum of annual compensation plus net proceeds that CEOs received as part of the sale of shares acquired through stock options.

As a group, acute-care providers saw a decrease of 29.9% in total compensation as their collective market capitalizations took a beating—and a tough operating environment took some of the wind out of the sails of two initial public offerings in the sector: HCA and Vanguard Health Systems, both located in Nashville.

In contrast, specialty-care provider CEOs saw a 45.2% bump in total compensation. While many post-acute and home-care operators saw their share prices run into trouble, DaVita, Select Medical and Magellan Health Services reported gains—and their top executives were rewarded in kind.

In the payer sector, executives at the helm of the investor-owned health insurance companies tracked by Modern Healthcare saw a 19.8% boost in pay, and all of the top 10 companies witnessed share price growth averaging 36.8%.

Aaron Boyd, Equilar's director of research, noted companies have become more aggressive in setting goals for CEOs, and equity awards have played an increasingly bigger role in compensation. They are also incorporating “total shareholder return,” or how much money is returned to shareholders, as a performance measure.

For the third year running, the highest-paid executive among the three provider sectors was Stephen Hemsley, president and CEO of UnitedHealth Group, Minneapolis, who earned $42.2 million. Hemsley's pay totaled $13.4 million in annual compensation and $28.8 million in exercised stock options.

A UnitedHealth Group spokesman could not be reached for comment. Hemsley's annual compensation was more than double the $6.3 million he earned in 2010, but he cashed in fewer stock options for a lower realized compensation package last year.

The company had a strong financial year, reflected in a stock price that climbed 42.2% between the last trading day of 2010 and the last trading day of 2011.

David Cordani, president and CEO of Cigna Corp., had the highest annual compensation among insurers at $16.4 million, but he exercised fewer stock options than Hemsley for a realized pay of $18.4 million.

Kent Thiry, chairman and CEO of kidney-care and dialysis company DaVita, Denver, took home the highest pay package among specialty-care providers and the second highest overall among all three provider groups. Thiry earned nearly $5.5 million in annual compensation—a decrease from his 2010 annual compensation of almost $9.4 million—but he exercised $24.5 million in stock options, which resulted in an overall pay gain of 91.6%. Thiry also topped the specialty-care list last year.

“Our CEO's compensation is incentive-based,” DaVita spokesman Skip Thurman said in an e-mail. “Nearly 90% of his 2011 compensation was exercised equity, all of which was set to expire within the next year.”

Among acute-care CEOs, Wayne Smith, chairman, president and CEO of Community Health Systems, Franklin, Tenn., earned the highest annual compensation package—$21.1 million, which was all in cash as Smith did not exercise any stock options in 2011 as he's done in previous years.

Community's share price took the largest hit among health systems in 2011, largely related to the fallout from its failed attempt to acquire Tenet Healthcare Corp., Dallas. Its market capitalization fell 53.3% during the course of the year.

As part of Tenet's efforts to stave off the takeover, the system filed suit against Community in April 2011, lobbing allegations that Community had improperly billed payers by using short-stay admissions instead of observation. That same quarter, Community saw its same-facility admissions decrease 5.6% quarter over quarter, and the company's admissions practices soon became the subject of investigations.

As a result of its share performance, the company took measures this year to adjust payouts for its management team. It disclosed in a proxy filing that its compensation committee took a number of actions, such as not increasing base salary or cash incentive compensation for its key executives, reducing equity awards and withholding a portion of 2011 cash incentive awards. It also added total shareholder return as a performance metric.

The filing said the measures “will continue to seek to ensure that executive compensation is properly aligned with stockholder return.”

A spokeswoman for the company declined to comment beyond the proxy filing.

Tenet President and CEO Trevor Fetter, meanwhile, came in second on the list of hospital operators, earning $10.7 million. He also did not exercise any options. The company's share price closed 23.3% lower on the last trading day of 2011 compared with the closing price a year earlier.

A company proxy filing from this year also noted that aggregate 2011 compensation for its top officers declined compared with 2010, “which aligns with (the company's) pay-for-performance philosophy.” It added that none of Tenet's top officers received an increase in 2011 base salary and pointed out that Fetter's compensation decreased 11.5%.

As the highest earner, Community Health's Smith unseated HCA Chairman and CEO Richard Bracken, who last year took home $41.3 million—most of it in the form of annual compensation. HCA, which priced its initial public offering on March 10, 2011, at about $30 a share, did not maintain its momentum, closing the year with shares trading about two-thirds of their IPO value. In comparison, Vanguard's shares, which debuted on the New York Stock Exchange on June 22, 2011, were trading 43.4% lower when they closed on the last trading day of the year. Bracken's total compensation for 2011 was $8.5 million, including almost $2.8 million in exercised stock options, representing the largest CEO compensation decrease in all sectors. Yet the company noted in a 2011 proxy filing that Bracken's 2010 pay was boosted by more than $21.7 million in cash distributions from vested stock options. Kevin Murphy, professor of finance and business economics at the University of Southern California's Marshall School of Business, noted that stock options provide some hedge for performance, allowing executives' total pay to rise or fall alongside the broader market. “It certainly seems like CEO pay in the S&P 500 healthcare field has mirrored CEO pay in the full S&P 500,” Murphy said in an e-mail. “There seems to be a slightly higher emphasis on stock-based compensation in healthcare. Median realized pay for 2012 is higher in healthcare, but the average realized pay is similar.” Across the S&P 500, for-profit CEO salaries rose 6.2% and top executives reported median total compensation packages of $9.6 million, the Equilar report found. “We saw pay go up for the second year in a row,” across the S&P 500, Boyd said, adding that the past two years have counteracted the pay decreases of 2008 and 2009. “It's really more of a return to the more normal changes we've seen.”

—with Paul Barr and Jessica Zigmond

TAKEAWAY: Healthcare executives' pay generally rose and fell with their companies' performance in 2011, with median executive compensation for the industry up 3.8% over 2010.