How Healthcare Executive Compensation Is Impacted by Value-Based Payments

Executive compensation has long played a critical role in the retention of experienced healthcare leaders, but a push for high-value care is changing the way that managed care organizations are rewarding their leaders.

Recently, there’s been a shift in compensation plans from offering a base salary to an annual incentive plan derived from a short list of goals related to addressing the organization’s vulnerabilities and then a long-term incentive opportunity.

Clive Fields, MD, chief medical officer of VillageMD, a national provider of primary care and president of Houston-based Village Family Practice, believes as the healthcare system moves to value-based payment, executive payment will move behind it.

“In many cases, they are still paid by emergency room admissions, inpatient admissions, etc. To truly succeed in value-based care, executives have to align as well with the healthcare system and focus on value not volume,” he says. “In other words, hospital CEOs and executives must be on the same page and same directive as the physicians.”

The macro changes within value-based payments are being seen throughout and integrated in hospitals and with executives, things Fields notes everyone is paying strict attention to.

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“More inpatient beds are being closed or repurposed, such as for long-term care, skilled nursing, and rehabilitation-all of which are in short supply,” he says. “We’re also seeing the physical plants they’re managing move in the same way.”  

Julian Hagmann, vice president of Caring Professionals Inc., a New York-based homecare company, has spent nearly a decade working with care providers, medical staff, and business professionals. He has seen first-hand how the push for high-value care is impacting executive compensation in the managed care space-and says change was definitely needed.

“Considering the managed care organization is in charge of patient outcomes and are responsible for overseeing all aspects of one’s care, it is appropriate to offer a bonus incentive to the managed care organizations so that there is a focus on quality and therefore increased patient outcomes, rather than only being concerned with enrollment numbers,” he says. “The hope in doing this is to improve quality of life for the enrollees and to reduce Medicare and Medicaid spending on preventable items such as ER visits, falls, shortness of breath, etc.”

Hagmann notes the plans are being held to quality standards imposed by CMS and the Department of Health and explains that members of a plan get assessed every six months. During that assessment, they go through a list of questions surrounding quality of care being received from in the home to care management. These include: Preventable Avoidable Hospitalizations, Flu Shot Compliance, Falls, ER Visits, Shortness of Breath, and Urinary Incontinence & Pain Intensity-basically anything that could potentially result in the patient being admitted to a hospital or nursing home.

“Should those scores improve, then the managed care organization receives a bonus for showing improved patient outcomes, should that fall below their current rating, or whatever metric they chose, then they would not receive a bonus,” he says.

Evolving payment models

In 2018, B.E. Smith conducted The Executive Compensation Intelligence Report, its second-ever executive compensation survey, garnering responses from more than 350 healthcare leaders. They learned that 69% of respondents self-reported a compensation level between $100,000 to $299,000 and another 19% reported earning between $300,000 and $499,000, while 6% exceeded $500,000. Echoing the previous annual survey, 45% of respondents said their compensation was higher than the previous year.

However, the industry’s interest and shift to more value-based care has resulted in healthcare organizations assuming increasing financial risk as reimbursement models change from fee-for-service to pay-for-performance. That has impacted executive compensation everywhere.

A transition to value-based care has put pressure on healthcare leaders to do more-and do better-with less. The changes the industry is experiencing were expected, Fields says, as they meet the needs of an aging or more chronic population that we’re seeing today. 

“This is the most efficient and best value for healthcare,” he says. “The skill sets needed for a successful executive will shift as well. It will require them to be most skilled in outpatient facilities and physician engagement.” 

That could mean that finding and retaining savvy executives up to the task can be a struggle, especially if they’re dealing with old compensation models. Not surprisingly, more organizations are exploring alternative compensation plans.

Hagmann agrees that these changes have been a work in progress for some time now and things will most likely continue evolving.  

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“When you look at Medicaid and Medicare spending, there is a large number that is associated with preventable factors,” he says. “Therefore, by putting the burden onto the plan and providers, you are forcing them to interject with solutions before it leads to a higher expense within the hospital network. CMS pushed these into the hospital setting.”

He adds that compensations are being impacted because the growth from the baby boomer population in the next five to 15 years is so great that the funds, which are used for these programs, need to be managed in a more cost saving way than in previous years.

“Being the dollars are federal- and state-originated funds, the focus needs to be on quality and therefore needs to be implemented at the plan level,” Hagmann says.

The B.E. Smith survey theorized that compensation is most effective when it is aligned closely with an organization’s strategic goals and explored this issue in detail.

Its findings revealed that as organizations look to address rapid and difficult change, they appear to be experiencing misalignment in regard to compensation. As such, approximately 60% of respondents in the survey noted their compensation and overall strategies are seriously or slightly misaligned, while just 40% suggested compensation was aligned.

Doug Chaet, chief managed care officer of the Cleveland Clinic, hasn’t seen a whole lot tied to high-value care performance, citing the fact that the provider side historically has had a tendency to incentivize better care to a much lesser extent.

“If you’re an executive who has a compensation package of $400,000 a year, in all likelihood, 80% to 90% of what you’re earning is guaranteed compensation,” he says. “Conversely, if you’re a similarly positioned executive in the payer world, depending on your level, your incentive comp could be two to three times your base comp.”

Still, Chaet’s experience has been that regardless of which methodology one looks at, most of the incentive piece tends to have more to do with overall company performance and less to do with how well one is able to differentiate themselves as being high-value.

A narrowing applicant field

Steven Sullivan, managing director at the executive compensation consulting firm Pearl Meyer, a New York-based compensation consulting company, says high-value care is one of several themes finding its way into executive compensation, consisting of high levels of clinical quality, very high patient experience, and efficiency.

“Delivering on all three of those simultaneously is incredibly difficult,” he says. “U.S. healthcare is not really set up that way and the whole idea that instead of being accountable to you until you go out the door in a wheelchair to your car, the healthcare system now is accountable for all the things that happen to you after that and what is the outcome of that.”

Therefore, when an executive team puts together a business strategy to accomplish progress and success on those three items, they have come to realize it’s a complicated process that will take a long time.

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“They have things they will need to do for a year or two or three, that are really the building blocks of things they are going to have to do in four or five or six years,” Sullivan says. “That’s one of the impacts of the push for high-value care. It’s made everyone realize it’s a long journey, So, executive compensation, which historically has been base salary and incentives, now is base salary, short-term incentive and long-term incentive, and more of the focus in on multi-year, variable compensation programs which in one or more ways are tied to the triple aim.”

The idea here, Sullivan continues, is that if one can bring about progress in patient experience and efficiency, you’ll build value year over year. The long, multi-year incentive program is more aligned to this.

“Many of these programs are three- or four-year measurement periods and they overlap so there’s an ongoing annual participation in a plan and it comes to term over three to four years, but during that time, the executives have re-upped their participation,” he says. “It becomes an annual part of their executive pay, it’s just the amount they pay out is predicated on how things have gone the prior three to four years.”

Sullivan says the market for executive compensation in middle-market and larger healthcare systems is moving very fast-not only is there a push for high-value care, but there’s a diminishing pool of people who understand that and can pull it together and function as a CEO in a large healthcare system and bring about all the sequenced multitude of change that needs to occur.

“The less of the folks that there are, the more they cost,” he says. “Plus, the challenge associated with bringing about these transformation of organizations is incredible. There’s less people who can do it and it gets harder every year. That can be a lethal one-two punch, and pay is going to go up. It can increase from 3% to as much as 6% and 7% a year.”

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The ones who will survive are the ones with a strong relationship between the board and executive team. If the executive team does well, they are happy because they are getting paid and the board will be happy because their goals are being executed.

“Folks don’t stay for 30 years anymore. People are more apt to come and go, so there’s more recruiting and need for retention going on,” Sullivan says. “On the recruiting side, if you can put together a program like one of these multi-tiered incentive programs of short and long, it can be a great recruiting team because people will know you’re serious about transforming the organization. They will expect to be well paid, but only when the performance is there.”

The future of compensation

Most agree the landscape of the future will not be the same as today. Hagmann, for one, does not see as many managed care companies operating. Rather, he sees a significant drop in those organizations-whether it is through M&A or state government action.

“Look at the past year, we have had Centene and CVS start purchasing organizations in New York City; ICS [Independence Care Systems] was forced to step back from being a provider and give their case mix to VNSNY [Visiting Nurse Service of New York], and those are just the tip of the iceberg,” he says. “The future boomers are going to be utilizing managed care companies, which means the room for growth is great-so great that I am sure we will see other major players buy and consolidate other plans.”

He also sees this as a time for development and testing of technology, which will be used to increase patient outcomes. While a majority of the population being serviced now lacks the knowledge and trust in tech, Hagmann says it is imperative for these products to be in-place for when the Gen X and millennial generations age.  

Optimizing patient care and well-being while maintaining financial strength is a difficult balancing act, as many see compensation as a major lever to manage this effort. In the years ahead, healthcare organizations will need to remain vigilant in this area, since the velocity of change today makes the compensation/strategy match challenging.

Keith Loria is an award-winning journalist who has been writing for major newspapers and magazines for close to 20 years.