Patient quality playing bigger role in for-profit exec bonuses

Executives recruited into the C-suites of for-profit healthcare companies can expect their bonuses and at-risk compensation to be increasingly pegged to performance on patient quality, safety and satisfaction, experts say.

RegionalCare Hospital Partners, an eight-hospital for-profit system based in Brentwood, Tenn., that is merging with Capella Healthcare, put patient performance metrics into its executive bonus formula three years ago, said Chairman and CEO Marty Rash.

Patients are going to seek care where quality and satisfaction are highest, Rash said. So, it was natural for the RegionalCare board of directors and the board's compensation committee to tie a double-digit portion of executive bonuses to attaining those targets, he said. “If we say that our purpose and responsibility is to deliver high-quality care that is safe and compassionate, then it is imperative that we align the way we evaluate our leaders with our purpose,” Rash said.

The widespread adoption of detailed patient quality and service measures in annual healthcare executive bonus and at-risk compensation plans is a fairly new phenomenon, said David Yang, principal at national executive compensation consultant Frederic W. Cook & Co., which has published a survey of compensation trends for decades.

Before 2010, Yang estimates that no more than one-quarter of the 20-plus largest publicly traded hospital and healthcare companies told shareholders in proxies or other financial filings exactly how much the attainment of patient quality and satisfaction goals would affect executive bonuses. Today, the number is above 50%, Yang said.

Proxies recently filed for upcoming annual shareholder meetings show such giants as HCA, HealthSouth Corp., Kindred Healthcare and others using patient quality and service metrics to determine from 15% to 30% of annual performance bonuses for senior executives.

These large investor-owned hospital companies are trailing behind their colleagues in the not-for-profit sector, who have had about a five-year head start, said Jose Pagoaga, managing principal at Sullivan, Cotter and Associates, an executive compensation consultancy specializing in healthcare.

The reason is twofold. First, shareholders of the publicly traded companies measure success by the returns they get on investment. Stockholder pressure forces these companies to emphasize financial measures such as income on operations and total shareholder return in setting executive bonus formulas, Pagoaga said.

But there has been another dynamic at play.

The not-for-profit systems, which tend to be local or regional in nature, have been affected sooner and to a greater degree than their for-profit rivals by Medicare's push to value-based purchasing on care and other at-risk reimbursement trends that either penalize or reward systems for meeting quality metrics, he said.

The investor-owned systems, to some extent, have been insulated from these trends by operating in very diverse markets, including those that have remained largely fee-for-service, he said.

But no market today is immune from at-risk contracting. Pagoaga said the items selected for rewarding executives change “as operating emphasis changes.”

HCA, the nation's largest hospital company by revenue, was one of the earliest investor-owned hospital companies to begin pegging executive bonuses to quality.

“In 2010, we added quality-of-care performance as a consideration in our annual incentive compensation program for executives, and since then, we have continually structured our incentive programs to strengthen the link between our executives' compensation and the company's commitment to delivering the highest quality care to our patients,” HCA said in a written statement.

In 2014, HCA began including specific quality-of-care and patient-experience metrics, with 15% of top senior executives' annual incentive based on quality measures in 2014 and 2015. That has been boosted to 20% in 2016, HCA said.

A lot of money can be at stake for executives at the largest for-profit firms.

HCA CEO Milton Johnson in 2015 was able to earn an annual performance bonus of about $4.3 million in cash and stock on a base salary of $1.3 million by achieving benchmarks for EBITDA (85% of award) and patient quality and satisfaction (15%). That doesn't include millions of dollars more in long-term incentives such as stock awards.

Chief Financial Officer William Rutherford added a performance bonus of $1.3 million to his base salary of $750,000 and Chief Operating Officer Sam Hazen $2 million on a base salary of $950,000, according to HCA's 2016 proxy.

The main quality measures are based on three areas: preventing hospital-acquired conditions; outcomes on stroke patients, immunizations and a few other conditions; and performance on customer satisfaction surveys.

HealthSouth Corp., the rehabilitation hospital giant, is an example of how healthcare boards and their compensation committees are constantly recalibrating what they consider to be the right mix of financial and quality measures in executive bonuses.

In 2015, HealthSouth, which has used quality metrics for senior executive bonuses since 2013, cut the percentage that quality played in executive bonuses from 30% to 20%.

That was a one-time event, said Cheryl Levy, HealthSouth's chief human resources officer.

HealthSouth throttled it back a bit because it was just venturing heavily into home healthcare, Levy said. The integration of the home health business had the potential to skew quality measures so it was deemed appropriate to scale back for one year to focus more on the financial performance of the company, Levy said.

With that integration well along now, the quality percentage was bumped back up to 30% for the organization's top 15 executives in 2016, she said.

Moreover, the company increased the mix of quality in bonuses for the next tier of executives. About 160 regional and hospital presidents across the system moved to 40% in 2016 from 30% last year to further push improvements, she said.

The inclusion of patient quality and service measures in determining executive bonuses will only become more widespread, said Tom Flannery, a partner at Mercer specializing in executive compensation and performance. “It's in every well-designed executive compensation plan,” he said.

While financial performance still carries the most weight in determining executive bonuses and overall compensation, consumers are judging hospitals and health systems not by how much money they earn but by the quality of care and service they provide, he said.

With the Internet putting quality and satisfaction scores at the fingertips of patients, those measures are becoming differentiators in where people seek care and what providers' insurers want in their delivery networks, he said.

That doesn't change whether the system is investor-owned or not-for-profit, Flannery said. “After all, they're competing for the same patients and contracts.”