Pay for value

When voters in one California hospital district last November approved a ballot measure intended to limit what El Camino Hospital could pay its executives and managers, the hospital's board worried about the implications in terms of attracting and retaining skilled administrators to work at the publicly run facility.

Under Measure M, 394-bed El Camino, Mountain View, could have paid its executives no more than twice what the state's governor earned, or about $330,500. The mandate raised uncertainties over whether the hospital could retain top-flight executives if they couldn't offer salaries competitive with similar-sized facilities. El Camino President and CEO Toni Ryba earned $695,000 as a base salary in 2012, plus a bonus of $137,815. Measure M could have hurt El Camino's ability to retain Ryba and other executives, says hospital spokeswoman Chris Ernst. The measure would have reduced Ryba's pay to the level of “a rural hospital about a quarter of our size,” she says.

The issue became moot last month when the Santa Clara County (Calif.) Superior Court ruled the measure unconstitutional.

Such public and government scrutiny of executive salaries has continued to intensify nationwide. But so has the need for healthcare organizations to retain knowledgeable, talented healthcare executives in an increasingly complex operating environment, which observers say requires competitive compensation.

Executives' value outweighs any bottom-line advantages that might come from slashing salaries, says Deborah Bowen, president and CEO of the American College of Healthcare Executives. Even though trimming executive pay might be seen as an easy way for healthcare organizations to control expenses while facing the pressures from falling volumes and reimbursement, Bowen contends the downside isn't worth it.

“The salaries for healthcare executives, compared to their corporate counterparts in business—I don't think the increases are dramatic,” she says.

This year, according to Modern Healthcare's 33rd annual Executive Compensation Survey, the average base salary rose 3.3% overall for 25 healthcare executive and administrative titles that the survey tracks at hospitals—compared with 2012 raises considering inflation. Data for the survey were provided by Chicago-based compensation consultancy Sullivan, Cotter and Associates. Total cash compensation, which includes bonuses and incentives, rose 4% or twice the rate of inflation.

Experts view the larger increases in total cash compensation as another indicator of healthcare's shift toward a value-based reimbursement model where quality and better outcomes are rewarded based on performance.

Executives working at systems saw average base salaries rise by 3.4% for 2013, based on the 36 titles included in the survey. Average total cash compensation rose 4.8%.

Average total cash compensation based on all hospital executive titles surveyed increased from $263,224 last year to $273,709 in 2013. Among the 25 titles, CEOs earned the most, with an average total cash compensation of $719,536. Top business development executives earned the lowest average total compensation, $202,785 in 2013, even though they saw a strong percentage gain compared with the previous year.

The average total cash compensation for presidents and CEOs at free-standing hospitals with net revenue of more than $250 million was $876,420 in 2013, a 5.8% increase from 2012's $825,959. That's the category El Camino falls under based on the Sullivan, Cotter data. El Camino officials were relieved when Santa Clara County Superior Court Judge James Kleinberg in late July ruled that Measure M was unconstitutional and couldn't be applied to hospital districts.

If El Camino CEO Ryba achieved all of her performance-bonus targets, she would have earned $832,815, according to the hospital. When compared with this year's survey numbers, that's $43,605, or 5%, less than the average for similarly sized hospitals. For El Camino, the impact of the ballot measures wouldn't have hit only the CEO; it also would have applied to other executives, administrators and managers.

Such forced cuts likely would have been a consideration even for mid-level professionals evaluating their long-term career prospects, says Kathy Hastings, a managing director at Sullivan, Cotter. “Supply and demand for executive talent are key considerations; caps on compensation may present a greater challenge when the labor market is tight and qualified candidates have other employment options with higher-pay opportunities.”

Between 80% and 90% of organizations participating in this year's survey reported they use incentive packages, Hastings says, which also shows how healthcare providers, like employers in other industries, are placing a greater emphasis on pay for performance, not only based on financial goals but also increasingly based on scoring well on quality improvement and other healthcare outcomes measures. It's not unusual for employment contracts to include incentives tied to achieving organizational goals, such as hitting quality metrics that are developed by the CMS, she says.

“It's not just about financial performance, it's about quality and patient satisfaction, it's about integration, it's about network development and better health development,” Hastings says.

The shift toward more incentives has reduced labor costs for healthcare companies below the averages for all industries, according to a white paper released last month by PricewaterhouseCoopers. That research showed healthcare companies spent $87,221 per full-time employee in 2012 compared with $92,712 in 2011, a 5.9% decrease. The average labor cost per FTE for all industries was $101,566 in 2012.

“Anecdotally, some causes of this decrease include an increased emphasis on performance management and pay for performance,” according to the PWC study.

Why would executives be OK with signing a contract with less guaranteed salary? Because they don't have much of a choice. Making bonuses and incentives a larger percentage of compensation is how more healthcare providers are dealing with the mounting scrutiny over what they pay executives, says Deedra Hartung, senior executive vice president and managing principal of Cejka Executive Search, St. Louis.

Incentives allow the employer to reward executives for ensuring positive patient experiences and hitting other benchmarks. And they penalize them if they fall short. The bonuses also enhance transparency. While metrics can be confusing even for hospital staff, they are a lot easier to explain than overarching board goals for a hospital that are subjective, Hartung says.

Tying money to a benchmark also shows employees that a hospital is serious about achieving its goals—whether it's reducing hospital readmissions or angioplasty performance, Hartung says. “Financial performance continues to be a driver for bonus opportunities, but we are beginning to see a slow change toward using the quality indicators of the organization,” she says. “Clinical outcomes will drive reimbursements in the future.”

Dr. Ronald Wyatt, medical director in the division of healthcare improvement at the Joint Commission, agrees with that assessment, saying the mantra “no money, no mission,” is being flipped, thanks to the emphasis on quality. The carrot-and-stick approach is accelerating the transition toward value-based approaches, he says.

The shift toward outcomes-based compensation already seems to be reflected in managers' compensation trends, based on this year's survey results. For example, average total cash compensation for the top quality management executive at healthcare systems rose 7.4% for 2013 to $310,800, up from $289,500 in the previous year. That job title posted the second-highest overall percentage growth for systems. Quality managers at hospitals also saw strong gains. Those without medical degrees saw a 5.1% increase in total compensation year over year. Physicians holding quality-management roles saw their pay rise 4.1%.

Given the intensifying spotlight on quality, Wyatt isn't surprised to see those job titles post strong growth. “You have to have people who are trained and understand how you move toward a culture of safety,” he says.

Collaboration is also a part of the quality manager's job, since they interact on teams that include the chief of the medical staff and chief information officer, says George Hickman, board chairman of the College of Healthcare Information Management Executives. IT executives were among the survey's top gainers at healthcare systems. The top five were ambulatory care (7.9%), CIO (7.1%), business development and the president/CEO, which both showed 6.4% gains in average total cash compensation.

CIOs at hospitals also saw strong gains in 2013, earning $315,922 in total cash compensation, the eighth-highest of all titles. That's a 5.2% increase from 2012, scoring No. 4 on the list of largest total cash compensation increases. CIOs and business development executives were the only positions that were among the top five percentage increases at hospitals as well as health systems. (See chart, p. 26.)

The role of the CIO is critical, Hickman says, since hiring the wrong person can have lasting implications for an organization. He recalls two instances within the past six months where large healthcare organizations quickly rolled out a new combination of clinical and financial systems, in a “big bang” manner. Neither implementation went well because of poor design and control. That affected hospital billing. Strong IT leadership would have prevented the missteps, he says.

“I would expect that the value of a chief information or technology officer will continue to appreciate in coming years,” says Hickman, who also works as the executive vice president and CIO at 644-bed Albany (N.Y.) Medical Center.

Information technology managers also hold greater value since their skills are highly transferable across industries, Hickman says. That marketability makes competitive compensation even more important. “Consulting jobs seem to be at an all-time high for a CIO type if they choose to pursue them,” he says.

While the methodology of the 2013 survey remained unchanged from 2012, there were a few changes in titles. Sullivan, Cotter, for the first time since starting the survey, had enough data to add chief nursing officer, with 71 health systems reporting compensation information for that specific position. Previously, those administrators had been classified as “top nursing executive.” Average total cash compensation rose 4.4% this year to $316,676. CNOs at hospitals earned average total cash compensation of $242,568 in 2013, a 5.2% increase.

Expect to see more new positions in future surveys, including physician executive leadership positions tied to accountable care organizations—as well as others resulting from changes under the Patient Protection and Affordable Care Act, says Tom Pavlik, managing principal at Sullivan, Cotter. This year saw an increase in such physician leadership posts, but not enough providers reported numbers to include the titles in the survey.

He calls the changes in job titles and the work they are doing an “evolution as opposed to a revolution.”

Follow Ashok Selvam on Twitter: @MH_aselvam