Annual incentive plans are also being extended beyond the top-level executives to managers throughout the organization, data show. In 2017, 71% of health systems reported having an annual incentive plan for management positions specific to their department, marking a steady increase in the use of those plans over the past three years.
Many providers are trying to grow volume and increase patient safety, which presents challenges in setting targets for compensation packages due to unanticipated changes in the payer mix, population fluctuations and shifting utilization, said Ed Steinhoff, a managing director at Pearl Meyer who also specializes in executive pay. Metrics aren't all or nothing, they are a moving target, he said.
"Systems are setting targets on a relative basis, which helps balance the uncertainty of today's system and external influences," Steinhoff said.
Shifts in compensation packages signify the conflict hospitals are experiencing in transitioning to new delivery models. Integrating EHRs into the workflow, forming ACOs, aligning clinical processes and removing unnecessary utilization and variation require significant investment in infrastructure and training.
"It's a conundrum health systems face now that they own outpatient clinics, ambulatory surgery centers or doctors' groups," said Julie Coffman, a leader in the healthcare and organization practices at Bain & Co. "If you still have hospital leadership packages solely based on profit and loss, that is completely at odds with value-based care. You have to harmonize that."
"You are caught in the middle if you switch too quickly—there are a lot of costs to rationalize and if you still make productive margins on fee-for-service, then that is working against you," Coffman said.
Yet, it takes more than changing incentive packages to alter the trajectory of a health system; compensation is an important lever to drive outcomes but it's not the only one, she said.
"To ensure the operating model is aligned with the strategic intent, you need proper structure, defined roles, accountability, the right metrics and mix of incentives for organizations to succeed in today's industry."