Hospitals grapple with a surge of CEO exits

John Muir Health CEO Cal Knight planned to retire last year, but like many hospital and health system leaders, decided to delay his departure amid the COVID-19 pandemic.

That gave the board of the Northern California-based not-for-profit system an extra year to identify and interview internal and external candidates. The search yielded more than 60 candidates, who board members vetted after developing a profile of the ideal chief executive. The incoming CEO would need to navigate John Muir’s clinical and management affiliations, cultivate physician relationships, identify underserved community needs and demonstrate strong business and financial acumen, said Kathleen Odne, chair of John Muir’s board.

Board members ultimately chose Mike Thomas, the chief transformation officer at John Muir, to succeed Knight.

“It creates such organizational upheaval if you don’t make the right choice. We would keep saying, ‘We have to get this right,’” Odne said. “Selecting the next CEO is arguably a not-for-profit board’s most important role.”

A wave of CEO departures is hitting the hospital sector as executives hope the worst of the pandemic has passed. But less than half of hospitals are fully prepared, research shows, portending a range of financial and organizational consequences, industry observers said.

More than 60 hospital CEOs left their roles through the first half of 2022, according to search firm Challenger, Gray & Christmas, although the data doesn’t differentiate between retirements, unplanned exits, merger consolidations or closures. That turnover rate marks a 48% year-over-year increase, and more departures are expected through 2023.

For example, Jefferson Health CEO Dr. Stephen Klasko retired in December, former CommonSpirit CEO Lloyd Dean retired in August, former Memorial Healthcare System CEO Aurelio Fernandez retired in April, MetroHealth System CEO Dr. Akram Boutros will retire at the end of the year and RWJBarnabas Health CEO Barry Ostrowsky is also set to retire at the end of the year.

But only 44% of 260 hospitals surveyed in the 2021 Governance Institute biennial report maintain a written, updated CEO and senior executive succession plan.

“That is an issue that really warrants national attention. It’s a big piece of work and the data shows it’s not being done well,” said Lawrence Prybil, health management and policy professor at the University of Kentucky, noting the recent CEO churn across the healthcare system is as high as he has seen.

A bad executive hire can cost an organization between five and 15-times their base pay, said Bill Dixon, a managing director at the executive compensation consultancy Pearl Meyer, citing a 2018 report from executive search firm Acadia Associates. Staff may disengage from the organization if the leadership change isn’t communicated well, he said.

“A poor hire leads to additional financial and cultural consequences beyond the transition,” Dixon said. “A systemic approach to leadership planning has paid off for the rare few (health systems) that have a depth chart for each position and view succession planning as a core part of their strategy.”

To-do list

Scripps Health, a not-for-profit health system based in San Diego, has emergency and long-term succession planning protocols.

Chris Van Gorder, who has been president and CEO of Scripps since 2000, regularly updates a letter detailing potential CEO candidates in case of an emergency. Each proposal outlines the candidate’s training and whether Van Gorder thinks they are prepared for a promotion to CEO. The communications team regularly updates a draft of an internal memo briefing employees on an unexpected leadership change.

Ideally, someone in the health system is ready to step up immediately. Scripps has internal development programs for different levels of its workforce. Staff, managers and supervisors attend monthly training sessions over a six-month span, where they can ask senior leadership questions and learn more about how each department works. The organization has a color-coded system signifying which employees are ready for a promotion, if they are on track to move up or if they aren’t ready.

Van Gorder promised the board he would give a year’s notice when he leaves and help train his successor.

“I meet with all my executives one day a week and interact with them every day. It’s always on my mind—what are they doing now, how well are they doing it and what experience do they need,” he said. “Our job is to give them the experiences they need to broaden their horizons and prepare them for the next role.”

Sharp HealthCare, an integrated health system also based in San Diego, faced four senior leadership changes in short succession. Former CEO Mike Murphy announced his plan to retire in 2018 after 22 years as chief executive. He stepped down in early 2019. At the same time, the president of operations, general counsel and chief information officer were also planning to leave.

Sharp staggered the exits of each executive over a three-year period. To limit disruption, system leaders regularly update a list of individuals who are nearing retirement and their potential successors, Sharp CEO Chris Howard said.

“We ask our key leaders to provide us names of prospects to keep in mind should the day come that they retire or leave,” he said. “It’s a work in progress, and you have to adapt it from time to time.”

That systematic process is often where most hospitals and health systems fall short, recruiters and management consultants said.

“I bet every hospital says they have a succession plan. The question is, is it a living, active document,” said Christine Mackey-Ross, president of AMN executive and physician leadership search. “Developmental plans have to be owned by very committed people.”

Less than a third of hospital executives polled in 2018 said they had updated their CEO succession plan within the past two years, according to the most recent version of the American Hospital Association governance report. Similar to the Governance Institute’s findings, the report found less than half of hospitals and health systems had a formal succession plan.

“It is the board’s most important long-term decision to pick a CEO. But the reality of COVID, competition, reimbursement levels and inflationary cost structures makes it hard to plan,” said Tom Giella, head of healthcare services for executive recruiter Korn Ferry. “The board’s job, as stewards of the hospital’s mission, is to be thinking about the future—not the past and not even much in the present.”

Looking ahead

Succession planning decisions carry more weight amid the tumultuous healthcare environment. Boards are tasked with finding a CEO who can manage the shift to remote care, working with new payment models, waning reimbursement levels and a workforce in flux.

Those who qualify for the job will get a pay boost, experts said. Total cash compensation for hospital CEOs rose 17.2% from 2021 to 2022, according to a survey of 493 hospital CEOs by the consultancy SullivanCotter. 

Hospital executive compensation has increased steadily over the past decade. But the pay increases aren’t necessarily linked to performance. They are often based on competition, said Steve Sullivan, managing director at Pearl Meyer.

“I don’t think there is a ceiling on what providers will pay to find a CEO that can run a complex healthcare system. Recruiters are getting their asking rate,” he said.

When hospitals are searching for new CEOs, leadership needs to be transparent with the employees, consultants said.

John Muir, for instance, conducted a series of town halls to update employees on the search process and address any questions, Odne said.

“We gave as much information as possible about the process and the timeline,” she said. “Employees have been dealing with so much around the pandemic and nursing shortage, so they needed to know the board was taking this seriously and working hard.”

Without an ongoing dialogue, employees are more likely to leave the organization as they wonder whether their project will continue under new leadership and if their jobs will change, AMN’s Mackey-Ross said.

“Even if a CEO leaves unexpectedly, there should be a No. 2 hanging in the wings. It should not be a disruptive event,” she said.