THCB

So That’s What You Get The Big Bucks For?

flying cadeuciiWhat motivates a healthcare executive?

Remember Flower’s Laws of Behavioral Economics? The first two are:

  1. People do what you pay them to do.
  2. People do exactly what you pay them to do.

That is, it’s not general. It’s not “be a good doctor.” It’s more like, “Do lots of complex back fusion surgeries.” What’s more profitable gets done more.

I know that some people say that money has nothing to do with people’s motivation in healthcare, and that’s fine, I totally respect that opinion. You’re just in the wrong section. You want Aisle C, between Dr. Seuss and the Disney fairy tales.

But what about healthcare executives? What gets them more money? What constitutes hitting it into the cheap seats for them?

There are of course lots of compensation surveys. There’s a whole industry of people who do that. But they don’t tie compensation to anything specific. So when someone does a study that does look at correlations, that’s interesting information. One came out a few months ago in JAMA’s Internal Medicine .

Karen Joynt, MD, and her colleagues used 2009 data, so things might be beginning to change now. And they only looked at CEOs, so we will have to speculate whether the same things apply to other C-suite suits.

What did they find? They found great variation in the salaries, with a mean (average) salary of $595,781, a median (half are above and half below) of $404,938). The nearly $200,000 difference tells us that the sample is skewed by a smaller number of really large salaries at the top.

There is nothing surprising in the size of the salaries or their variation. That’s normal for any industry. No matter how much you might think that healthcare is special and different and sacred, it is nonetheless a very big business. In many or most towns, the hospitals and health systems are the biggest businesses in town. A typical suburban three-hospital system might have an annual budget in the $5 billion range.

What correlates with a higher salary? Size.

More beds means a higher salary ($550 for each extra bed, to be exact). Teaching status means $425,078 more — in other words, doubling the median. And most teaching hospitals are much bigger than average. Urban location gets you more, but this is likely also a marker for size, or the cliché phrase “big city hospital” wouldn’t roll off the tongue so easily. High tech gets you more, too. Hospitals with high technologic capabilities paid their CEOs $135,862 more than hospitals with low levels of technology — but this again is likely a marker (a co-variate) for size and teaching status.

The one apparent performance marker that varies with compensation: Patient satisfaction. “Hospitals with high performance on patient satisfaction compensated their CEOs $51,706 more than did those with low performance on patient satisfaction,” according to Dr. Joynt et al. Oddly, though, I think this is also often a marker for size. Patients tend to think you’re good if you’re large and well-known. Famously, one Massachusetts survey rated Massachusetts General’s OB-GYN and birthing program as the most highly-regarded in the state — at a time when it actually did not even have one.

So you get paid more if you run a big enterprise. No surprise. Perhaps more telling is what showed no correlation with compensation at all:

  • margins
  • liquidity
  • capitalization
  • occupancy rates
  • process quality performance
  • mortality rates
  • readmission rates
  • measures of community benefit

Every one of these, in one way or another, is a measure of real performance. In other words, if you pay more to hire and retain a better, more skilled, more experienced CEO, here’s where you would expect the return on your investment. And it’s not there.

We are moving into a time when healthcare has a wildly different and more complex economic base than it is used to, an economic situation in which most of the people now running healthcare enterprises are newbies, and most of the new conglomerations, concatenations and congeries of healthcare capabilities and financing structures being slapped together are prototypes. It’s prototypes all the way down.

How would you measure and pay for executive performance in such an environment? What is it that you really want? Is it the margin of the whole enterprise, including its insurance arm and any accountable-care joint ventures it has set up? What if you paid the CEO 0.2% of that margin (I’ll do the arithmetic: On a $5 billion enterprise with, say, a 5% margin, that would be $1 million). What behavior would that drive? No margin, you’re on food stamps, buddy.

How about 0.02% of margin ($100,000 in our example), plus large bonuses for outcome markers such as lower readmission rates and lower mortality rates, plus certain process performance markers? What behavior would that drive?

In what other ways could executive pay be tied to the performance that we really want to see?

We are increasingly talking about (and sometimes implementing) many different ways of paying physicians for performance, with many different types of incentives beyond those labeled “Pay For Performance.” Yet clearly the executive talent driving the strategies of these major organization needs to adapt and up their game for the new world of healthcare — and clearly across healthcare many if not most are hanging back, unclear on the best strategy, playing it as safe as possible by consolidating and sticking as much as possible to the old model.

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back painBreakthroughs In Stem Cells (Annasa)Barry CarolJeanneFromClearhealthcostsPeter1 Recent comment authors
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back pain
Guest

Its all about health i must say

Barry Carol
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Barry Carol

People don’t get rich in America by working for a salary, even a high level executive salary because all they have to sell is their time and expertise. They get rich by being an owner of or partner in a successful business which is organized to profit from the combined efforts of all employees. For executives of publicly owned and traded companies, serious potential wealth comes from stock options and restricted stock awards. For ordinary folks like the rest of us, it comes from investing in stocks, real estate investment trusts, oil and gas MLP’s and the like. It’s also… Read more »

Breakthroughs In Stem Cells (Annasa)
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Joe Flower
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I agree that complaining about executive pay, either of healthcare organizations or health insurers, as a percentage of healthcare costs misses the point. The concern about executive pay is not the amount, it is what it gives them incentives to do: How is hospital and health system strategy skewed by the personal financial priorities of the CEOs who drive them?

@BobbyGvegas
Guest

Yeah.

I have never stated nor implied that CEO salaries add visibly to U.S. aggregate health care spending. They are an ethical affront in their own right. That a top cardiovascular surgeon can cut me open, fix life-threateningly damaged stuff, sew me back up, and save my life, yet be compensated at a small fraction of that of the top Healthcare/Pharma C Suite exec is a reflection of our egregiously misaligned socioeconomic values — one that extends well beyond the healthcare space, as we all know by now.

Barry Carol
Guest
Barry Carol

I don’t think CEO leadership or CEO pay are the important issues here. I think payment incentives for good, cost-effective care and penalties for sub-par care are more important. CMS is moving in this direction with is plan to pay bonuses to Medicare Advantage plans that perform above a set quality threshold. Penalizing hospitals for excessive readmission rates is another move in that direction. A CEO’s marching orders from the trustees or board usually boil down to grow revenue and sustain or improve profitability. If through considerable effort and leadership the hospital reduces infection rates and preventable readmissions and loses… Read more »

JeanneFromClearhealthcosts
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As long as there is a seemingly endless stream of money, there’s no real incentive to tie pay to performance. That’s especially true in the health-care marketplace, where it’s always someone else’s money.

The best way to get a handle on pay for performance is for the stream of money to stop.

I come from the world of journalism, where for many many years people all the way up and down the food chain refused to believe that the stream of money would dwindle or stop. Once that happened, epochal change arrived.

Old models seem comfy, until they aren’t any more.

Peter1
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Peter1

As long as we view health care on the revenue side instead on the expense side we won’t contain costs/prices/growth. Just think what government would look like if we considered it a profit center.

John Ballard
Guest

Good point. I read somewhere that in Finland empty hospital beds are considered a good sign that the community is in good health.

Jeff Goldsmith
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Jeff Goldsmith

I think Joe is onto something here. It’s seemed to me for some time that one of the big motivations of hospital mergers is that it is a path to significantly increasing the CEO salary of the surviving CEO. You sometimes have difficulties figuring out who the surviving CEO is, unlike in corporate mergers where one CEO is paid handsomely to go away. A surprising number of non-profit mergers come unglued in early stages over succession issues. There has also been an incestuous and lucrative compensation consulting practice that has helped leverage top executive salaries upward based on a completely… Read more »

Joe Flower
Guest

Good thoughts, Jeff. Yes, the “incestuous and lucrative compensation practice” bases salaries on hospitals of similar size — because they lack anything else to compare them to.

Joe Flower
Guest

Oh, and thanks for referring to your June post. That was an interesting and useful analysis.

Perry
Guest
Perry

“What correlates with a higher salary? Size.”

So… Apparently size does matter.

“Other constituents, such as device manufacturers, pharmaceutical companies and even hospital administrators, may not necessarily have that perspective.”

Hospitals are here to make money. Doctors, yes also need to make money, but they have the moral and ethical requirement to try to do the right things (not that they always do). In this age of escalating healthcare costs and massive turmoil in the health field, what would drive the hospital administrator to “do well by their patient”?

Vik Khanna
Guest

Hospital administrators, unfortunately, are motivated mostly by a two-part mantra: maximize reimbursement, optimize payer mix. Translation: make sure we always get as much money as we can for each discharge, and let’s try to get as many private pay patients as possible in the door. As we labor with the issues of overdiagnosis and overtreatment, we need to find a way to put hospital administrators on the hot seat for the approrpriateness of the care provided in their facilities. Hoodwinking communities with b.s.-based screening programs is not a value add for most Americans, the majority of whom are generally healthy… Read more »

John Ballard
Guest

Thank you for this. Every time I come across a mention of “screening” I say to myself there’s another one — trolling for business. Of course those with specific risk factors or symptoms indicating a problem should be tested. But a cattle call for everybody who darkens the door to be “screened” is categorically different. As you say, most people are generally healthy.

Joe Flower
Guest

I love this paragraph from the Rosenthal article:

“Most doctors want to do well by their patients,” said Dr. Abeel A. Mangi, a cardiothoracic surgeon at the Yale School of Medicine, who is teaming up with a group at the Yale School of Management to better evaluate cost and outcomes in his department. “Other constituents, such as device manufacturers, pharmaceutical companies and even hospital administrators, may not necessarily have that perspective.”

Jay Hancock
Guest

Hi Joe: Good piece. On this subject, check out our research last year on bonus incentives for hospital CEOs. We looked at the actual bonus packages, many thru FOIAs at publicly owned teaching institutions. Bonuses for chief executives at major medical centers are geared far more toward revenue, margins and procedures than they are toward quality and efficiency. JH

http://www.kaiserhealthnews.org/stories/2013/june/06/hospital-ceo-compensation-mainbar.aspx

Joe Flower
Guest

Ah, thanks for that, Jay. I looked for other pieces to complement the Joynt study, but I missed that one. Looks useful.

@BobbyGvegas
Guest

Almost all of the publicly traded health insurers reported big increases in revenue and profits last year. The big winners have been the top executives of those companies, led by Mark Bertolini, CEO of Aetna, the nation’s third largest health insurer. Bertolini’s total compensation of $30.7 million in 2013 was 131 percent higher than in 2012. If the stock prices of these firms keep growing at the current pace, Bertolini and his peers can expect to be rewarded even more handsomely this year, especially if they can hike premiums high enough to satisfy shareholders. According to Health Plan Week, a… Read more »

@BobbyGvegas
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@BobbyGvegas
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John Ballard
Guest

Oops, sorry. That was for the other link. Elisabeth Rosenthal is another trooper. As a journalist she is eligible for prizes, and her work is prize-worthy, too.

Joe Flower is doing the heavy lifting as usual. This post deserves to be read far and wide.

I’m pleased to know that somewhere in the system hospitals actually track margins, liquidity and capital investments. I knew about all that other stuff but I always wondered if billing and accounting was just throw some s**** against the wall and see what sticks.

I hope somebody important is getting this.

@BobbyGvegas
Guest

“Joe Flower is doing the heavy lifting as usual. This post deserves to be read far and wide.”
__

Agreed. The most broadly knowledgeable and charitable healthcare thinker I’ve run across.

John Ballard
Guest

Potter is a treasure. Too bad there are no prizes for people like him. Fact is, if he keeps it up he may need to be in a witness protection program.