Hospital Exec Pay: If P4P is Good Enough for Doctors, Why Not the CEO?

In my previous blog, I made the argument that whatever strategy we use to improve care in hospitals will not be implemented and executed well without proper focus by hospital leadership.  So, it is in this context, that we recently published some pretty disappointing findings that are worth reflecting on.

We examined the pay of CEOs across U.S. hospitals and found that some CEOs got paid a lot more than others.  This was not surprising.  CEOs of larger, urban, teaching hospitals get paid a lot more than CEOs of small, rural, non-teaching institutions.  But the disappointment was around quality:  we found no relationship between a hospital’s quality performance and the pay of the CEO.  Holding size, teaching, and other factors constant, what was the pay of CEOs of hospitals with high mortality rates?

About the same as CEOs of hospitals with low mortality rates.  What about other quality measures?  Most of them didn’t really seem to matter, with the exception of patient experience, which correlated nicely with CEO compensation.  It seems that when setting CEO compensation, patient outcomes are not a big part of the discussion.  How could this be, and why does it matter?

How you set incentives for senior managers says a lot about your priorities.  Boards generally set the salary for their CEOs and they clearly reward patient satisfaction scores.  That’s good.  They also seem to reward the things that build hospital reputations: having the latest technology such as a PET scanner or academic status.  But are boards rewarding CEOs based on mortality rates or adherence to basic quality metrics?  Not so much.  Why not?  I’ve spoken to a lot of board chairpersons over the years and the answer is not that they don’t care.  Most boards want to reward quality and believe that they do.

The problem is that most board members lack sufficient expertise on quality metrics and can’t decipher, from the large number of quality metrics, which ones are important (like mortality rates) and which ones are not.  Hamstrung, they focus on satisfaction but also end up rewarding things that feel like proxies for quality, such as having the latest technology.  And here’s the part that’s frustrating – our national efforts on quality measurement and improvement are not helping.  We seem to have done very little to prioritize what’s really important, and shine a light on them.

So what do we do to move forward?  Some states have started requiring that boards undergo training in quality.  Medicare, as a condition of participation, could certainly require that boards (or at least some members thereof) show a degree of expertise with quality.  I like these ideas but worry that training programs would themselves be of variable quality, and for some boards it would become an onerous requirement without achieving real gains in expertise.

Of course, if we really want to help boards be more effective and engage healthcare leaders, the biggest thing that we could do is actually reward hospitals, in a meaningful way, based on quality.  Yes, we have the value-based purchasing program, and it is well-intentioned.  But, as I’ve written before, it has several big problems.  First and foremost:  the incentives are very weak and there is little reason to believe it will have a meaningful impact on patient outcomes.  Second, the measures are diffuse – we have too many of them, some of which matter (mortality) and many which don’t in the absence of the appropriate clinical context (checking the ejection fraction on a heart failure patient).  It’s hard for hospital boards to really get a clear signal on what matters if they aren’t seeing it clearly and consistently from national leaders on quality.

So how might we move forward?  I’d like to see, from CMS and other payers, strong incentives tied to patient safety, such as low hospital-acquired infection rates and patient outcomes (i.e. low mortality).  That would send clear signals to boards that their chief executives need to be focused on what matters to patients.  If the incentives are sizeable enough, and the metrics clear enough, boards will take notice and have clearer guidance for where to focus their efforts to hold management accountable.

The bottom line is that leadership matters enormously.  Leaders set priorities, create the culture, and define what constitutes success for the organization.  Currently, as I often hear Don Berwick say, we have a system that is perfectly designed to give us the results that it does.  We can do better.  Too often, we look to the Virginia Masons and the Intermountains of the world and say that if they can do it, anyone can.  That’s fundamentally not right – they do it despite the fact that the incentives are stacked against them.

We need to build a system for the ordinary, and not the extraordinary CEO – those leaders –who, despite commitment and the best of intentions, prioritize things that their incentive structure tells them to prioritize.  And remember, these organizations, run by ordinary CEOs, care for a vast majority of Americans.  And the job of boards and policy leaders should be simple: align the incentives so that hospitals and their leaders can really focus on doing what’s good for patients.

Ashish Jha, MD, MPH is the C. Boyden Gray Associate Professor of Health Policy and Management at the Harvard School of Public Health. He blogs at An Ounce of Evidencewhere this post originally appeared. He is also the Senior Editor-in-Chief for Healthcare: The Journal of Delivery Science and Innovation.

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  19. legacyflyer –

    I hadn’t thought about the BS committee meetings, the nurses coming around to check on various protocols and the “put out to pasture” employees coming to work at the clinic. I can also appreciate the “take what comes to me” mentality among the now salaried doctors. So, I can understand that each salaried doctor is likely to see fewer patients per day than when the practice was independently owned.

    On the other hand, if the docs are seeing fewer patients and perhaps spending more time with those they do see, maybe some of those CAD or diabetes patients will only come in every six months instead of every three months or every month and not be any worse off for it. Maybe there will be more time for end of life care discussions and opportunities to convince patients that more care doesn’t mean better care and more expensive care isn’t necessarily better care either.

    I know that academic medical centers are the most expensive places to deliver care because they also have an education mission and a research function that they need to pay for which are not fully compensated by GME payments from Medicare or research grants from the NIH and philanthropy. Community hospitals have higher costs than clinics or independent imaging centers because they need to be open and staffed 24 hours per day instead of 8-12 and they have more uncompensated care that they have to recoup from insured patients.

    I can accept the facility fee for care that is delivered inside the hospital on both an inpatient and an outpatient basis. The fees have no place, however, in off campus clinics, imaging centers, rehab centers, etc. that are only staffed during normal business hours.

  20. Barry,

    Medical accounting is a black art, best understood by those who have sworn an oath to secrecy and partaken of the blood from a sacrificed animal. (In other words, don’t ask me to explain it)

    As for the 6 doc practice let me suggest several things:

    1) Expenses will probably increase. They used to get by with crappy used equipment but they now want the best. ( I remember a quote from the one CEO I thought was good. “You guys keep wanting me to buy the best and most expensive equipment for the hospital, but in your office you are using pea-shooters.”)

    2) The hospital will want to have multiple meetings to discuss various BS Committees and the salaried docs will rightly demand that these meetings take place during the work day. Result is fewer patients seen.

    3) Various nurses with clipboards will come around to ensure that the policies on: Core Values, Mission Statements, Latex Allergy, Employment Non discrimination, Flu Vaccination protocols, , etc. are discussed. No patients seen.

    4) Receptionists, Secretaries and Nurses that are not wanted in other areas of the hospital will be “put out to pasture” to work for this 6 doc group. Fewer patients seen, less patient satisfaction.

    5) But most important, docs who used to be hustlers will sit back and take what comes to them. “Why should I bust my ass, now that I am employed”

    I practice in Maryland where rates are controlled by the HSCRC. I can tell you that if you have an XRay, CT, MRI at a hospital it is likely to cost substantially more than at an outpatient office. The outpatient office cost is determined by negotiation with insurers and Medicare Rates. The hospital cost is determined by black magic and the HSCRC. And of course there is all kinds of cost shifting going on with the HSCRC approved rates. Nevertheless hospital rates are substantially higher than office rates. Maybe you could explain it to me.

  21. legacyflyer –

    Thanks for your very interesting and informative response.

    There is one thing I would like you to help me and the rest of us understand a little better. Suppose an independent practice of, say, six doctors practicing in its own building sells out to a hospital and begin working for a salary. Putting aside the potential productivity issue how does what they were doing and will continue to do suddenly become more expensive especially if they were already implementing electronic medical records?

    The only way I can see costs going up is if the hospital starts to allocate some of its overhead to the newly acquired practice on top of the practice expenses it already had. Allocating costs can be done in a lot of different ways and there is a lot of variability from one hospital to another.

    Some costs such as billing might be removed from the practice and taken over by the hospital’s billing office. Malpractice insurance premiums might be absorbed by a captive insurer if the hospital system is big enough to self-insure that risk. That could result in savings as well.

    For services, tests and procedures performed outside of the hospital campus, it doesn’t seem that a facility fee would be justified just because a physician practice or imaging center suddenly becomes hospital owned instead of independent. The bottom line is that a lot of these supposedly higher costs appear to have more to do with arcane and often arbitrary accounting approaches than with inherently higher costs per se. What am I missing here?

  22. Currently a major change in how physicians are employed occurring. A large number of physicians are moving from self employed to hospital employed because of uncertainties about the ACA and the onerous burden imposed on them by the EMR.

    In a couple of years, there should be data about what effect this has had. Of course, it will be difficult to tease it out because of all the other changes going on.

    I think a couple of things will occur:

    1) Physician “productivity” will decline. This will be due to a combination of the EMR and different incentives. This is not necessarily a bad thing if unneeded procedures are reduced – just don’t be so sure that the unnecessary will be cut rather than the unprofitable!

    2) Hospital CEOs will have less problems with “disruptive” physicians because most physicians will be employed and hence more easily controlled. This is also not necessarily a good thing since some physician
    “disruption” has been about quality issues.

    3) The cost to provide a unit of medical care will go up. Physicians in their own offices are much more productive and efficient than when they are employed by hospitals. The cost of many procedures done in hospital are much higher than if done in an office (Radiology included)

    As you can see, I am not all that optimistic that things will get better.

  23. legacyflyer –

    I hear you. At the margin, I think a hospital CEO who is also a physician would have more credibility with the doctors and nurses, other things equal. However, I note that Paul Levy, a non-physician, did a great job of turning things around at BIDMC in Boston so it can be done. I don’t know the breakdown between physician and non-physician hospital CEO’s but it seems that a good percentage of them are doctors and, in a few cases, former nurses.

    It also seems that in theory, it would be easier to get cultural buy-in from physicians if the docs are also salaried employees of the hospital as opposed to independent contractors with practice privileges. If they are employees, though, bonus compensation should be determined by something other than relative value units billed. The culture should be collegial and collaborative and peer pressure should mitigate any temptation to slack off if physician generated revenue is not being tracked. Mayo and Kaiser are able to make this work but culture and hiring the right personality types are critical, I think.

    The organization needs to be able to provide high quality care with quality metrics that are measurable and appropriate and the care needs to be delivered cost-effectively. Again, we also need to move away from the fee for service payment model. Even DRG’s need some attention to the extent that some of them are attributable to treating hospital acquired infections and preventable readmissions. Preventable harm should not be reimbursed, in my opinion.

    I would be interested in your perspective, especially with respect to the issue of salaried docs vs. independent doctors with practice privileges and what changes, if any, are needed in how hospitals are paid.

  24. Normally I agree with what Barry has to say. But ….

    I do agree that leadership matters, but do NOT agree that the CEO of a hospital is seen as a leader by the physicians or nurses. To most physicians, the CEO is a “suit” whose purpose it is to :
    1) Protect his/her own job.
    2) Cater to the Board and/or to the Execs of the hospital chain.
    3) Give lip service to quality, but for the most part to ignore it.

    I was the Chief of a Hospital Department for 6 years and during that time got to interact with the CEO and members of the Hospital Board. I was not impressed! The number of dumb things that the CEO did while I was there were astounding:

    – Tried to start a hospital affiliated primary care network and failed. Purchased doctors practices and then had to give them back at a huge loss.

    – Tried to “economically credential” an Orthopedic group into closing their outpatient surgery center and failed. And in the course of this managed to get sued by the group and the State Medical Society – and lost the suit.

    I could go on but you get the point. And at every step of the way, he was backed by the Board – a group of local lawyers, insurance agents, bankers, etc. And the sad fact of the matter is that if he had merely tried to run a good hospital, rather than listen to all the consultants he hired, he probably would have done much better.

    At another hospital where I have privileges, the CEO has changed 5 or 6 times during the period I worked there. The only good CEO was the first one, who was a Physician. The rest were a bunch of “suits” who were looking to move up the Corporate ladder and didn’t last long.

    I think it was Churchill who said: “You can count on the Americans to do the right thing – after they have tried everything else”

    I would say: “You can count on a Hospital CEO to do the right thing, after he has tried everything else.”

  25. “The other big problem is that under a fee for service payment model, quality improvements can actually shrink revenue by eliminating or reducing previously compensated rework”

    “Every misspent dollar in our health care system is part of someone’s paycheck.”

    – Brent James, MD, M.Stat

  26. “The bottom line is that leadership matters enormously. Leaders set priorities, create the culture, and define what constitutes success for the organization.”

    I agree with this 100%. There are a couple of issues that need to be addressed, however.

    As I understand it, the incentive compensation for hospital CEO’s and other senior management people is geared primarily to driving growth in hospital revenue, profit, market share and reputation. If boards wanted to drive quality, they could make it a much bigger factor in the determination of senior management bonuses but first they have to define it.

    I think it was Uwe Reinhardt, in one of his Economix blog posts who suggested that care quality has four components that probably would have to be weighted appropriately. They are (1) process which means following evidence based guidelines and protocols, (2) outcomes, preferably risk adjusted, (3) safety which is minimizing hospital acquired infections and preventable readmissions and (4) patient satisfaction which can mean anything from good food, flat screen TV’s, and availability of valet parking for visitors to pleasant and attentive nurses and communicative doctors who delivered a positive medical outcome.

    The other big problem is that under a fee for service payment model, quality improvements can actually shrink revenue by eliminating or reducing previously compensated rework as well as payment for unnecessary and inappropriate care. To fix this, we need to move away from fee for service in favor of bundled payments for surgical procedures and capitation where appropriate but hospitals are probably not in a good position to accurately estimate their costs in advance.

    Presumably, if this were an easy issue to address, we would have done it a long time ago.

  27. So you are telling me that in our culture people don’t perform well unless a financial carrot to do so is forever dangled before their nose. Ok, as someone coming to this culture from the outside i take your word for it.

    Which makes me that that if we had financially the 10th Mountain Division and the Marines ipfighting in Afghanistan better, perhaps we would not be losing that war. “You take that hill with your platoon, Lt. jones, and you’ll get a $1000 bonus and your enlisted men a$100 each,” and so on.

    I think that would make our soldiers and Marines figt better.

  28. I think one of the greatest problems in our healthcare system is misaligned financial incentives. When there is misalignment in how management vs. rank and file get rewarded, it is yet another example of this. There is no reason that hospital and other executives cannot have incentives based on meaningful and shared quality measures, because they have an ability to impact them through hiring, establishment of a measurement and continuous quality improvement culture, etc. This is America and, like it or not, we are a very incentive-driven people. It makes sense to align executives incentives with their workforce so they make the choices that enable the workforce to deliver.

  29. People the world over beat their path to the doors of higher education in America. To an economist, that means something.

  30. “American university president’s, too, work without those tips, and I have heard that, by international standards, American universities are pretty good.”

    So University Presidents do a good job – measured how?

    – Is it the grade inflation that results in an average GPA of 3.5?
    – Is it the cost of a college education which has risen faster than the rate of inflation for many years?
    – Or is it in the enforcement of the liberal orthodoxy so prevalent on many campuses?

  31. Ashish,
    A very good column. I’ve been writing lately about the proliferation of hospital report cards( and I wonder if hospital boards are going to view them as the right proxy for quality.

    The key, in my mind, is to continue promoting the release of data and having researchers/journalists/the community use that data to begin making meaningful comparisons. We’re on the precipice of something big here.

  32. The CEO of UnitedHealthGroup is paid about $14 million a year. About 100x the pay of the typical family practice doc.

    BTW: UnitedHealthGroup now owns QSSI, one of the ObamaCare CusterFluck prime contractors.

  33. You may well be right, Ashish; but it is a sad commentary on hospital CEOs.

    Do you think we should pay military officers that way?


  34. Al — I agree that overutilization can make you look better on some quality metrics. That’s why we need to continue to improve those metrics. I think its doable…and there are plenty of good ones that don’t suffer from this problem, especially on the inpatient side (e.g. mortality after Acute MI).

  35. Uwe — I love your stories and think you are right on — professionalism, whether it is among doctors or CEOs, should work. I think it can for doctors and nurses if you create the right system in which to work.

    The question about CEOs and pay is this — professionalism alone should work in theory, but it hasn’t in practice. Too few hospitals make serious investments in quality and safety of care. Why not? How do we motivate them to change? How do we get leaders to focus? Who knows, may be a little financial incentive might help.

  36. It still amazes me, though, that, having learned that waiters and waitresses in restaurants tend to give better services to regular customers known to tip generously, economists theorized that CEOs, too, must be explicitly tipped for each and every good think that professional pride along ought to make them do. I guess professional pride has become old fashioned.

    As Germany’s Chancellor Merkel once acerbically lectured the CEO of Porsche who had his Board give him a huge bonus: “CEO’s in Japan preside over large car companies without a bonus, and I have heard that they are make pretty good cars in Japan.”

    American university president’s, too, work without those tips, and I have heard that, by international standards, American universities are pretty good.

  37. This shouldn’t be so hard to do in theory — hard quality information is already collected by Leapfrog. I’d ding the paycheck of a CEO who doesn’t participate in Leapfrog. It’s one thing to argue that a room is warm enough already. It’s another thing to do so without being willing to look at the thermostat.

    I’d like to pick up on a couple of other points. First, satisfaction often (not always) goes in the opposite direction of objective quality indicators. This is especially true for outpatient care, when doctors would rather prescribe the purple pill than tell people why they don’t need it and s/he isn’t going to give it to them, which could impact satisfaction.

    Second, technology often creates more unncessary utilization. Ironically, increased utilization could increase quality scores as viewed by the hospital and even Leapfrog, because increased utilzation usually results in fewer errors/1000. However, a buyer would prefer that people not get surgeries they don’t need. As Peter Drucker said: “Nothing is more wasteful than doing something efficiently that need not have been done at all.”

    And when they arrest surgeons for doing too unnecessary surgeries, often their argument is that their outcomes are good. Well, yeah, they should be if you’re doing thousands of the same surgeries on healthy patients.

  38. Great idea.

    I’m not sure this is going to be the most popular idea in history though. ; )

    While we’re at it – let’s also link other key players in the system IN PARTICULAR the tech guy responsible for implementing the EMR system that makes all of this wonderful work possible

    Unrelated meme: If we want to democratize this, let’s figure out a way to get NURSE compensation more directly linked to quality metrics as well. If we’re going to ask ’em to do the work, let’s give ’em a serious incentive ..

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