CEO Pay Incentives for Quality Uneven Among Hospitals

Modern Healthcare Print Version

May 7, 2014

Quality-of-care performance means more to CEO paychecks at some for-profit hospital companies than at others.

Among the five largest publicly traded systems, Tenet Healthcare Corp. and HCA go farthest in tying executive pay to quality-of-care measures. Still, use of quality incentives—the cash awards that companies reserve for top operational and strategic priorities and that can double an executive's salary—is uneven. At systems that explicitly pay executives based on quality, the weight given to incentives varies from 15 to 25%. Measures of performance used range from those indirectly related to quality, such as employee turnover, to those widely acknowledged as central, such as rates of fatal healthcare-associated infections.

But for an industry plagued with inconsistent patient safety and outcomes, healthcare has been slow to focus top executives' attention on quality by using performance-pay incentives. This is evident in compensation of the publicly traded health systems, which operate one in 10 U.S. hospitals and saw 3.8 million admissions last year.

It's probably not surprising that up to now financial measures have dominated incentives for for-profit hospital executives. "The emphasis is, first and foremost, financial," said Thomas Kelly, a compensation consultant for Towers Watson.

But as more insurers and employers demand greater transparency and accountability for quality, hospitals increasingly must compete on patient outcomes and safety. Research into incentive pay for top executives suggests that tying cash to quality metrics may improve hospital performance. And quality pay incentives for CEOs are a highly visible way for systems to publicly demonstrate their commitment to quality.

Patients expect quality

Ana Pujols-McKee, executive vice president and chief medical officer of the Joint Commission, said hospital systems with incentive payouts absolutely need to include quality-of-care performance in executive pay. "In an environment where there will be a bonus or an incentive for performance, I don't think it's reasonable to have it based purely on financial performance," she said. "Quality is the product we're paying for as the consumers. That's what we expect."

Dallas-based Tenet, which operates 77 hospitals, awards 25% of top executives' yearly cash incentives based on quality, the company's Securities and Exchange Commission filings show. To measure performance, the system's directors track the same measures used by Medicare to penalize or reward hospitals under the CMS' value-based purchasing initiative, such as rates of potentially avoidable infections. Trevor Fetter, Tenet's president and CEO, also earns incentive cash if hospital readmission rates drop and patient and physician satisfaction improve. Fetter earned $1.3 million in incentive pay in 2013. Tenet's chief financial officer, hospital president and general counsel have the same incentives.

While HCA does not place as much weight as Tenet does on quality incentives, its measures include rates of central line-associated blood stream and catheter-associated urinary tract infections. Incentives also are tied to performance on the CMS' core measures for heart attack, heart failure, pneumonia, surgery and immunization as well as patient-satisfaction scores, SEC filings show.

Last month, HCA, which operates 165 hospitals, added patient satisfaction and quality measures to its executives' incentive criteria. Quality will account for 15% of the Nashville-based system's 2014 annual cash incentive award for R. Milton Johnson, who was promoted to president and CEO from CFO after Richard Bracken, chairman, retired as chief executive last year.

Previously, HCA paid out bonuses based exclusively on earnings before interest, taxes, depreciation and amortization but allowed the board to use discretion to dock up to 20% based on quality performance. In 2013, the board did not dock any executive incentive awards based on quality, according to SEC filings. Bracken received $3.3 million as his incentive award last year and a salary of $1.4 million. Johnson last year received $1.4 million in cash incentives with salary of $899,983.

"We were among the first healthcare providers to tie our senior officers' performance bonuses to clinical quality," HCA spokesman Ed Fishbough said.

William Carpenter III, CEO of LifePoint Hospitals, which operates 61 hospitals, sees one-quarter of his annual cash incentive awarded on quality measures that include patient-satisfaction scores and completion of patient-safety planning and a questionnaire on patient-safety attitudes, SEC filings show. Carpenter received an incentive payout of $1.5 million for fiscal 2012 and a salary of $978,192.

Quality is one element considered

At Franklin, TN-based Community Health Systems, which acquired Health Management Associates in January and operates 208 hospitals, directors consider quality results as one element of incentives tied to performance improvements, said spokeswoman Tomi Galin. Quality measures approved by shareholders in 2009, however, are not broken out explicitly as performance measures. They include patient satisfaction and Joint Commission survey results, CMS core measures, physician and employee satisfaction, and workforce turnover.

In contrast, Universal Health Services, King of Prussia, PA, relies solely on financial performance to award incentives that totaled $2.3 million for Chairman and CEO Alan Miller last year in addition to salary of $1.5 million, SEC filings show.

In the not-for-profit hospital sector, the use of quality-based incentives for executive pay has rapidly proliferated in recent years. Two-thirds of not-for-profits included quality incentives in top executives' compensation last year, up from 57% the year before and 45% five years earlier, according to a survey by Sullivan Cotter & Associates.

David Bjork, senior vice president at the consulting firm Integrated Healthcare Strategies, said he now routinely sees clinical quality and patient satisfaction included in at-risk pay for not-for-profit executives. "It's so close to being universal that it's always a surprise when you find an institution that does not use incentives at all," he said.

Other priorities don't score higher

For example, Ascension Health, the nation's largest not-for-profit health system, uses quality measures in annual and three-year incentive plans. Annual incentives can increase executives' salaries by 10% to 80%, and long-term incentives can increase it by another 40% to 100%. Quality measures are reviewed and updated by the governing board annually and are not overshadowed by other priorities, said Herb Vallier, Ascension's executive vice president and chief human resources officer. "Finance would not be weighted any more than quality."

Compensation and quality experts say boards that tie executive pay to quality make the organization's commitment to quality more explicit. High-quality hospitals were more likely to have boards that identified quality as one of the two most important criteria for CEO evaluation, compared with hospitals that scored lower on quality measures, a 2010 study published in Health Affairs found. But another study published this past January in JAMA found no correlation between quality performance and CEO compensation among not-for-profit hospitals.

Both for-profit and not-for-profit hospitals may find it increasingly difficult, for both public relations and financial reasons, to ignore quality when awarding performance bonuses, consultants say. That's because hospitals are facing an accelerating push by Medicare and private insurers to tie hospital and physician reimbursement to quality performance. In addition, private insurers and employers are signing a growing number of agreements with hospitals to pay for quality. Aetna is expected to tie half its commercial reimbursement to performance by the end of 2014, up from 30% at the start of the year.

On top of that, more insurers and employers are offering health plans that include stronger financial incentives, such as high deductibles, for patients to shop for high-quality, lower-cost providers. Some large employers such as Wal-Mart are flying employees to provider sites with demonstrated high quality and competitive prices for certain procedures.

These mounting market pressures could force hospitals to be more public about their commitment to quality, and quality-based incentives to executives are part of that, said Thomas Flannery, a compensation consultant at Mercer. "It's about the image you want to project to the market."

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