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.

25 replies »

  1. 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 worth noting that quite a few CEO’s of hospitals are physicians by training including the CEO’s of the Cleveland Clinic and Partners Healthcare System. A small number are nurses by training as well. If we want these CEO’s to lead their institutions to provide the best possible care, the best way to do that is to better align medical payment incentives which means moving away from the fee for service payment model. It’s darn hard, though, to get hospitals to assume financial risk to any significant degree. It would also help if we stopped paying hospitals for avoidable harm though that’s far easier said than done because of the difficulty in definitively determining whether or not a hospital acquired infection or a readmission was avoidable or not.

    For better or worse, our capitalistic system does not compensate people based on someone’s perception of their contribution to society. Employers pay what the market tells them they need to pay to attract and hold qualified people. When pay exceeds this level, as in much of the public sector, there are large numbers of applicants for many of these available openings even when the economy is booming.

  2. 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.

  3. 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?

  4. 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.

  5. 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.

  6. 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 revenue in the process and finds itself needing to cut staff as a result, there’s a serious disconnect. Capitated contracts, shared savings and other payment arrangements that require hospitals to take on some financial risk are needed as an alternative to the fee for service payment model, in my opinion if we want them to reduce preventable harm. Price and quality transparency that make it easy for both patients and referring doctors to identify the most cost-effective high quality providers should help to reward those providers with more patients.

    As for executive compensation, there is a national or at least regional marketplace for this talent that requires hospitals to offer competitive salaries and bonuses. For doctors, the market for talent is also at least regional whereas for lower level staff, it’s local.

    With respect to compensation for health insurance CEO’s the bulk of it comes in the form of stock options and restricted stock awards which are largely paid for by shareholders in the form of earnings per share dilution. Cash compensation, by contrast, is paid for by customers. Besides, as I’ve noted numerous times before, even if the 25 highest paid executives for all of these insurers worked for free and the savings were used to reduce health insurance premiums, the price reduction would be a barely noticeable fraction of 1%. Give me a break.

  7. 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.

  8. 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.

  9. 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 and need a hospital-based screening like they needs another tax bill. To wit: when I did a site visit to a Fortune 1000 client to assess the quality of their food services program, I was surprised to see that one of the local hospitals had been given space to set up the equivalent of a hospitality suite in the company’s headquarters, to invite employees to learn more about their screenings and sign up for some. The enticement was free snacks. When I asked my hosts about the propriety of this, they said, without a trace of irony, “oh, well, they have all these great scanners and doctors over there, and they need to keep them busy and this helps them do that and it lets our employees learn about screenings they might need.”

    In principle, I don’t object to people running big enterprises making big bucks. I do object to it when it happens in tax-exempt institutions that are supposed to be providing something of community or charitable value in exchange for that tax subsidy. I also object to it when there is insufficient transparency about organizational finances. One way that people can learn about what’s going on regarding executive pay at hospitals in their locality is to get the hospital’s IRS Form 990. If it is not on the hospital website, you can get it by calling the executive offices or by searching on sites such as Charity Navigator.

  10. 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 circular “peer analysis” of institutions of comparable bed size.
    As a consequence, there are a depressing number of $3 million executive positions filled by $500 thousand people who would NEVER have achieved these salaries in a corporate (*e.g. for profit) setting where performance is more rigorously evaluated.

    One key to evaluating the other part of Joe’s argument is to look at what happened to CEO comp at the very large health systems whose operating earnings have collapsed recently (Sutter, Sisters of Providence, Partners Healthcare, Henry Ford, UPMC, etc.) which I discussed in a recent post here (https://thehealthcareblog.com/blog/2014/06/13/how-much-market-power-do-hospitals-really-have/) Some of these powerful places were able to cushion the blow with non-operating earnings, which is, in an important sense, passive income not as significantly affected by management actions.

    Keep your eyes open for a forthcoming analysis of the performance of the nation’s largest Integrated Delivery Networks that demonstrates how opaque the disclosures of their operating performance are, and how impossible it is to tell how their hospital and physician practice assets are performing along any dimension.

    If you want to tie executive comp more closely to performance, an important step is to insist on more transparent disclosure of this performance information. Rob Burns of Wharton and I have been working on this project since February for a Study Panel of the National Academy of Social Insurance and we expect it to be released in September.

  11. “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”?

  12. 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.”

  13. 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


  14. “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.

  15. 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.

  16. 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.

  17. 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 trade publication, the CEOs of the 11 largest for-profit companies were rewarded with compensation packages last year totaling more than $125 million.

  18. Hm, interesting. I wonder what relationship exists between hospital exec salary and physician salary, if any? I bet you’d see some surprising relationships.