The New Health System CEO
Investment in the healthcare CEO is an investment in the future health of the community
White Papers | January, 2015
It is widely recognized that all areas of healthcare are undergoing sweeping changes, and that sea change will not stop soon. An already complex industry has become even more so as the impact of the Affordable Care Act (ACA) is felt. The expectations of patients, communities, the government and general public are evolving and rising to higher levels than ever, primarily in terms of accessibility and affordability. This will impact the bottom line and margins of all healthcare organizations in increasingly significant ways.
Healthcare organizations, non-profits in particular, are already held to a higher degree of accountability than almost any other, and across all industries. Revenue must increase in order to provide efficient, high quality care, as under the ACA they will be held accountable for patient and family satisfaction, among many other utilization-based benchmarked criteria. Their scores in this area can have a profound impact on funding with the possibility of reimbursements being cut even further if certain metrics pre-determined as appropriate are not met.
The role and responsibility of the healthcare CEO is increasingly multi-dimensional and complex. It is largely focused on the management of a large organization with many diverse constituents and many moving parts. Each of those parts are complex themselves, and not infrequently in competition with each other. Nevertheless they must all function efficiently and smoothly as individual units but also together as the larger whole. The push toward physician integration and direct employment compensation models has exacerbated this. Now, in addition to hospital operations, healthcare organizations must manage physician practices and move more of their services beyond the four walls of the traditional acute care hospital.
All of these parts, but especially the organization that brings these disparate cultures and agendas together must operate together smoothly, reliably and effectively to produce a product that is high touch, high tech, patient centered and consistent; that product being the overall health, improvement and wellness of the medical center’s stakeholders. Those include people who rely on this complex organization for the overall well-being of their community and the individuals and families that comprise it. And increasingly that organization and its attendant responsibilities fall outside of the facility’s walls. They encompass outpatient facilities, surgery centers, rehabilitation units and other off-site ventures. These must all be maintained and enhanced in order to manage the fiscal health of the medical center, and the physical health of the populations it serves.
The growing complexities of medical center management
Effective management of health care delivery has always required that a leader possess a myriad of talents and skill sets. Already complex, and becoming more so, these organizations face regulations, standards and industry specific factors that include:
- Dependence upon the physician who admits the patient, determines what tests and procedures will be done and how long they will stay. However, much of the hospital’s reimbursement is fixed by payors. If the hospital loses money by following the physician’s orders, the physician is not held accountable. In fact, the physician often profits by keeping the patient in the hospital while, at the same time, the hospital loses revenue. Nevertheless, the government holds hospitals accountable for managing physicians with incentives that conflict with the hospitals’.
- No other industry has its fees determined by a third party. Well over half of the medical center’s reimbursement is mandated by the government in addition to the obligation to provide charity care.
- Reimbursement is being changed from “piece work” (by day, test, procedure, etc.) to outcomes for individuals and the community at large. Transitioning from one payment system and incentives to another will be complex. Medical centers now will be financially penalized should a patient be readmitted within 30 days after discharge, even if the readmission was due to the patient failing to follow their physician’s orders. Meanwhile the independent physician who manages the patient’s illness is not yet held to many of the same requirements or is penalized for failing to do so.
- The Affordable Care Act is encouraging the creation of Accountable Care Organizations to assume responsibility for care of communities which will ultimately require hospitals to enter into risk sharing agreements with physicians and payors or insurance companies.
- Reimbursement for hospital care is continually being reduced by the federal and state governments while regulations controlling the delivery of care are being expanded.
- Medical centers need to implement electronic medical record keeping that enables the sharing of information with all partners in patient care, though the benefits of that large investment of time, labor and funds are questioned by some.
- Patient care is rapidly moving from inpatient to outpatient requiring expensive new facilities, systems and care models.
- Physician shortages and governmental incentives are requiring health systems to employ or contract with physicians, an expensive prospect with high risk.
- Medical centers are compelled to enter into other lines of business (post-acute care that includes home health, hospice, long term acute care, etc.) in order to manage the patient’s outcome post-acute discharge. These are non-traditional lines of business requiring expertise in order to mitigate the financial and quality risks.
Unlike an industry that produces a standardized product, patient outcomes are as unique as each patient and the delivery of care, itself, must rely upon independent practicing physicians over whom they have limited control.
National trends in CEO pay in nonprofit hospitals and health systems
A recent study by Harvard University in The Journal of Internal Medicine (JAMA) found that CEO compensation can largely be correlated with the number of beds in their system, high ratings on patient satisfaction surveys, whether the institution has a teaching component, and if it has advanced technological capacity in terms of state-of-the-art equipment. No correlation seems to exist between pay and hospital margins, liquidity, occupancy rates, mortality rates or readmission rates, though under the ACA they will in the near future. And “when they do,” says the study’s author, Ashish Jha, “they can have a profound impact on the priorities and effectiveness of U.S. hospitals.”
Preparing for the many changes that will continue to challenge even the strongest organization in the strongest economic climates should be seen as a viable ROI by a system’s governing body, and it would not be a leap of any kind to think that those, coupled with the aforementioned complexities of managing a healthcare organization, must eventually factor into CEO pay.
Too many CEOs are not yet compensated based on a truly balanced score card, one which includes financial criteria, quality, patient/employee satisfaction, market penetration and many other quality related criteria. Rather, too much weight is given to financial savings that result primarily from cuts in staff and/or from other first line cost control measures. Until CEO pay adjusts to these many new realities, increases in pay will in all likelihood continue to be as modest as they have been for decades. Increases averaged only 4 percent in 2013, partly reflecting the overall economy and the uncertainly surrounding healthcare reform. The 2013 National Healthcare Leadership Compensation Survey, conducted by Integrated Healthcare Strategies and co-sponsored by the American Society for Healthcare Human Resources Administration, found that executives leading systems that include more than one hospital and/or additional outside entities only make between one-and-a-half to two times as much as leaders of individual hospitals.
That same survey found that the median salary of an independent health system CEO was $750,000 in 2013, compared with $539,000 for a subsidiary health system CEO. Independent hospital CEOs had median salaries of $380,000. Median cash compensation for health system CEOs ranges from $645,700 to $873,800, whereas cash compensation for individual hospital CEOs ranges from $368,700 to $402,500, all depending on the hospital's ownership status; ie whether for-profit, public or not.
Hospital CEO compensation in the future should be based on net revenue and the direct, related profit margin from all sources of income across all entities in the system with the number of employees, scope of services and complexity/largesse, the demographics of the patient mix, and other more relevant metrics taken into account. Beds size and inpatient occupancy is rapidly becoming irrelevant yet most salary surveys are still tied primarily to these two factors.
Additionally, most healthcare executives on the provider/hospital side earn, on average, one-third of what their for-profit counterparts in both healthcare service areas and non-healthcare businesses earn, largely in part due to their large bonuses and stock options. As many healthcare organizations continue to seek those leaders with the best and the brightest business minds with strong financial, strategic and marketing skills, they must realize that to attract and retain that talent they must compete for it across all industries – many of them routinely paying their leaders significantly more. And to further put the imbalance in perspective, some of those leaders may only be responsible for making blue jeans, for instance. Certainly not for responsibilities as important in every way imaginable as life and death. The healthcare organization’s “customer” will flourish or die, literally, depending on whether the leader of that organization can “get it right” by bringing all of the pieces of a very large puzzle together correctly, in the right fashion and heavily documented, to boot.
Physicians and nurses consistently rank among the most trusted professionals and rightly so given their visibility and the amount of direct contact they have with patients. Those leaders who “get it” prove it through demonstrated commitment to their organization’s clinical staff; by being transparent in their communications with them and engaging them to help develop strategic goals for improving the financial and clinical performance of the system. They will insure that they educate those on the front lines of patient care and seek out their input and inclusion in implementing new programs across all service lines to benefit the wellness of the community, with access points outside of the hospital footprint in order together to keep the many working pieces prosperous and poised for continued growth. As our health system evolves into one that increasingly values accountability, institutions must trust that those willing and able to lead their organizations to both high quality and financial outcomes deserve to be paid in a manner that reflects the successful achievement of those goals and objectives, in a solid, pay for performance base plus incentive model.
As with all things there are exceptions, and in the case of CEO compensation within healthcare those exceptions “prove the rule.” St. Louis based SSM Healthcare’s CEO received a 26 percent increase in 2011, though that hike was partially attributable to a job change, from COO to CEO.
Executives at other St. Louis-area nonprofit health organizations have seen increases of as much as 40 percent in their total compensation packages. Those increases are recognized as justifiable given the challenge of successfully running complex, multibillion-dollar systems with thin operating margins and high safety standards. And BJC Healthcare, one of those organizations, makes clear that, as it should be in all industries, their executives’ compensation is “at risk, based on improving patient satisfaction, reducing the cost of services to patients, patient safety and quality measures and operational performance.”
Interestingly, these significant, though rare, upgrades in CEO pay are only now being noticed somewhat by the governance of other non-profit, community health systems. Even then those systems remain slow to recognize and reward the deep leadership needed to balance a complex scorecard and achieve a healthy bottom line. Growing the organization in order to remain competitive in the future needs to be entrusted to qualified leaders and that trust must be properly rewarded when expectations are met – and exceeded.
Ascension Health Alliance acknowledges that “When we look for leadership of our ministry, we need to draw from the best and brightest to serve those who are poor and vulnerable.” Chief Advocacy Officer Jon Glaudemans says “We are required to be competitive...Candidly, many of our executives could do better for themselves working in other environments.” And Cynthia Mercer, senior vice president for human resources for Mercy Health, says “We’re competing for the same pool for talent. It’s difficult to secure talent...We pay for performance.” This attitude needs to become the norm and, just as importantly, boards need to become more adept and realistic in establishing goals and expectations for CEOs.
The newly evolved skill set of the hospital CEO
The demand for an increased portfolio of skills and experience is fueled by the expanding needs of large, complicated systems. Today’s healthcare CEO has to possess far more specialized knowledge about the day-to-day operations of the professionals they manage than did the leadership generation before them. At the same time they need to have the same strong, general business acumen that has been part of the skill set possessed for years by their counterparts in other industries.
“There are social issues,” said Dennis Horrigan, CEO of Catholic Medical Partners, an accountable care organization in Buffalo, N.Y. “There are operational issues. There are educational issues, which all come together when you take care of a population."
The qualities that are increasingly recognized as key to successful management of a health system include:
- Objective identification of problems and areas in need of improvement.
- The ability to standardize internal processes and practices in partnership with the physicians and clinicians that provide the care and who must also become fully integrated as participants in the culture shift of this equation.
- Establish, communicate and gain buy-in and support from stake holders for an overall vision for the organization’s future.
- Sensitivity to the impact of change on all stake holders, including employees and physicians, and maintain clear and consistent communications with them.
- Engage fully with the communities – internal and external – served by the organization, as well as future payors, potentially taking on direct risk.
- Robust financial and continuous quality improvement acuity.
Original and creative strategic thinking that works within a new paradigm that is intolerant of complacency.
A high level of comfort and confidence as new payment and care models are rolled out, including starting their own insurance plans.
Recognition that developing a care-centric delivery systems requires leaders with a unique combination of both analytical and relational skills.
Recognition of the value of marketing directly to the consumer as retail competitors quickly enter the market.
The ongoing changes and accompanying complexities, including the delivery of care outside of the traditional inpatient bed, are leading to changes in hiring throughout systems. As affordable and accountable care continues to spark institutional and cultural change, staffing needs will continue to change, too. Since 2009, as outcome-based payment replaces a fee-for-service system, the demand for radiologists, anesthesiologists and other specialists has been replaced by demand for primary care doctors, hospitalists, nurse practitioners and other physician extenders, and the shift in care to outside of institutional walls has lessened the need for bedside nurses.
Some governing boards and search firms are looking outside of the healthcare industry for talent. In fact, more than two-thirds of hospital CEOs hired in 2013 had little or no healthcare experience, an increase of 19 percent since 2009, and that is expect to rise even further. Value is being placed on non-industry productivity, business development and financial management experts with heavy technological expertise and Lean Six Sigman mentality and training.
Jackson Health System in Miami-Dade County, for example, hired a career banker, Carlos Migoya in 2011. He took over a system that had lost $428 million since 2007. By 2013 the system’s bottom line was $45.7 million, and it is undergoing an $830 million renovation and infrastructure upgrade. Mike Keating, CEO of Christ Hospital in Cincinnati, was an investment banker; Robert Meyer, president and CEO of Phoenix Children's Hospital, came from a consulting background; Michael Fisher led Premier Manufacturing Support Services before becoming the president and CEO of Cincinnati Children’s; and Wayne Pack, CHRO at Community Health Systems in Indianapolis held that same position at Brightpoint, a Fortune 100 company.
Keating’s former industry is one that, like healthcare now, went through significant consolidation and came under heavy governmental oversight. His and other productivity focused fields and sectors that experienced change similar to what healthcare faces now, are particularly valid sources for talented individuals who will effectively lead tomorrow’s hospitals and health systems.
Conclusions and Recommendations
“Healthcare is undergoing a dramatic transformation and it is imperative that boards and those who are charged with recruiting and hiring CEOs clearly understand the skill set needed today is different than in years past,” says Peter Betts, a consultant to healthcare boards and former CEO of Barnert Memorial Hospital in New Jersey and East Jefferson General Hospital in Louisiana. “In order to attract and retain top talent, compensation must be competitive nationally and across industries.”
With the scope of change sweeping the healthcare landscape it is imperative that hospital CEOs define and drive strategies for success, establishing cohesiveness within their systems by engaging all stakeholders, including providers, patients, communities and payors. These demands require that those charged with recruiting and hiring invest fully in terms of time and the appropriate – and competitive – compensation package to attract the level of talent needed, capable of leading a fully integrated team.
The role of the hospital CEO is undergoing radical change. Formerly an administrator whose role was first and foremost financial with hospital focused operational acumen, they are now change agents charged with uniting and leading a diverse team of stakeholders to improve the financial and clinical outcomes across much larger and dynamic institutions, many of whom are major economic forces in the communities they serve. Not infrequently they are the largest employer, as well.
Healthcare represents nearly 18 percent of our nation’s GDP, and it is not an overstatement to declare that the institutional leaders in this field, especially in the provider space, deserve to be compensated at the most competitive and warranted levels. After all, the financial health of a significant sector of our economy, and the physical health of the population as a whole, genuinely depends on it.
Incentive compensation that is tied to the same key tenants to which high performing, general business has been held to for years must be seen as appropriate, and necessary, by hospital boards. The faster, cheaper and better outcomes that will form the core of compensation plans that incent and retain CEOs must also be passed down to core staff on the front lines. This talent directly impacts the factors to which the hospital will be tied in the future, that being the patient experience across the continuum of care.
The dramatic change in the healthcare landscape demands a complex skill sets to deliver quality healthcare to all people. It is imperative that, ultimately, the responsible governing bodies set into motion the immediate development of a compensation and incentive model that will attract and retain this new breed of multi-talented, strategic and dynamic leader.