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Joseph Jasmon - Hospital CEO Pay - Houston Business Journal

Hospital CEO pay: Time for a check-up?

Quality. That’s the new word chief executives of hospital and health systems have to pay attention to these days.

Most discussions about the Affordable Care Act center around how it will change care for patients, but experts say hospital CEOs may soon see unwelcome changes in their paychecks if they aren’t able to meet new quality measures.

More hospital boards are expected to match greater portions of a CEO’s incentive package with improvements in quality. As a result, CEOs would only be paid the full measure of that incentive package if their hospital or system meets certain safety and quality scores.

It’s a shift from packages that have traditionally been tied to market share, patient satisfaction or financial performance, said Joe Jasmon, managing partner of Jacksonville, Fla.-based American Healthcare Management Group.

“Quality has not typically been the CEO’s responsibility,” Jasmon said. “Now, that percentage of the incentive program will be close to 25 to 30 percent and may soon be 40 to 50 percent of the incentive package.”

The new model is something CEOs should expect to see become the norm as the ACA begins to expand the number of Americans with health insurance in 2014. Under those parameters, for example, Dan Wolterman, the CEO of Memorial Hermann Health System would see about $500,000 of his $1 million bonus and incentive pay tied directly to his ability to lower infection levels or prevent readmissions — typical indicators of quality.

“Mr. Wolterman’s pay also has increased over the past several years during a period of unprecedented growth in our system,” said James Campbell, Memorial Hermann system spokesman. “The (compensation) committee’s independent compensation consultant has informed the committee that his pay is approximately equal to the 75th percentile of our peer group organizations. This pay level reflects our outstanding performance on our quality, patient satisfaction and other operating measures of performance, as a significant portion of his pay is performance-based.”

Memorial Hermann is the city’s largest health care system, with 11 hospitals and nearly 4,000 hospital beds in the area.

The Methodist Hospital System, the Houston region’s third-largest health care system with 2,105 beds and five hospitals, for years has tied incentives to quality performance for its CEO and other executive positions, said Stefanie Asin, director of public relations at Methodist. She wasn’t able to specify how much of the package is tied to those metrics, but described it as a “significant” portion.

Methodist’s 2011 tax return — the latest available — indicates that Ron Girotto, the former CEO, had a base compensation of $1.2 million, and a $700,000 bonus and incentives package. Dr. Marc Boom took over as CEO of Methodist in 2012.

SALARIES RISING

Medical sector CEO salaries continue to rise because there aren’t enough qualified candidates to fill vacant positions, according to a report by Minneapolis-based Integrated Healthcare Strategies. And hospital and health system CEOs already command the highest salaries and cash compensation in the medical industry, according to a 2012 integrated health networks compensation survey by New York-based Mercer LLC.

The highest-earning health system CEOs bring in a total payment package of about $1.5 million, while those on the lower end of the spectrum still earn about $982,000, according to the study.

The changing pay-package dynamic has the potential to impact not only a CEO’s paycheck, but at the same time is expected to improve the quality of care and reduce cost for residents in the area — experts say it creates a balancing act for administrators looking to improve efficiency while living under more scrutiny from the federal government.

“If someone on Medicare comes in for hip surgery, is discharged on time and 30 to 45 days later they are back with a complication like an infection, Medicare will take money back for that payment and pay less or not at all for the readmission,” Jasmon said.

And since Medicare is often a hospital’s largest payor — at times making up as much as 30 percent of its budget — such changes have the potential to whack away at a hospital’s bottom line, he said. In turn, those cuts could filter up to the C-suite.

Also, as the accountable care organization model grows, providers will more likely see private payors reimbursed for an episode of care rather than the traditional fee-for-service model.

For example, an episode of care, like a heart attack, would result in payment before service for all medical care rather than paying for each service or blood test rendered. Paying for an episode of care is predicted to lower the cost of health care and improve quality — likely helping CEOs achieve incentive targets.

MORE EVALUATION

Currently, more heads in beds translates into higher income for a hospital. As health care reform is fully implemented and the ACO model comes into play, however, hospitals will no longer be a system’s profit center, said Tom Flannery, a Boston partner of Mercer’s talent recruitment business.

A good indicator of the emerging trend is that, for the first time, hospital boards are asking for publicly available data from the Centers for Medicare & Medicaid Services and other entitities during the CEO hiring process, said Heather Kopecky, a Houston health care services consultant with Los Angeles-based Korn Ferry International (NYSE: KFY).

With the quality measurements available today, which detail every infection and readmission, a CEO’s track record can be easily traced.

“One organization had a team compare quality reports of organizations,” Kopecky said. “I tell CEOs up front that they need to share that data.”

However, she also points out that the quality data is just one piece of information a board may use to make its decision about an organization’s next leader.

Even after board members make their decision, they are consistently evaluating, a process that will likely intensify in future years as tougher quality measures are enacted, Flannery of Mercer said.

“They don’t necessarily approach it from a negative standpoint, but it’s a constant question we’re getting from boards: How do I know what I’m getting? How do I know it is appropriate given the market?” Flannery said.

In time, this shift to patients should result in better care, he said.

“Ultimately, when you’re talking about major health care systems, it’s going to be around things like, ‘Are we providing care at the level and quality that is appropriate and within cost parameters that society is willing to pay?’” he said.


Accountable care organization

A group of health care providers who give coordinated care and chronic disease management to improve the quality of care patients get. The organization’s payment is tied to achieving health care quality goals and outcomes that result in cost savings.

Fee for service

Method whereby a doctor performs a service and gets a fee in exchange.

Patient Protection and Affordable Care Act

Refers to two pieces of legislation that will expand Medicaid coverage to millions more Americans and expand health insurance coverage, eventually lower health care costs and provide more choices of coverage.

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