Written by Bob Herman | January 28, 2014

Becker's Hospital Review

This past July, what started as a regional issue and ballooned to a national issue ended as a nonissue.

The Santa Clara County (Calif.) Superior Court ruled a local ballot initiative from 2012 that would have capped the pay of executives at El Camino Hospital, a nonprofit, public hospital in Mountain View, Calif., was unconstitutional. Originally, 52 percent of people within the hospital's county voted to approve Measure M, which would have limited executive compensation to no more than twice the salary of California's governor.

Compensation has always been a sensitive topic for hospital executives, and although the El Camino ballot initiative fell by the wayside, the spotlight on executive pay only intensified.

In October, Harvard University researchers published a study in JAMA Internal Medicine, which looked at the compensation data of 1,877 CEOs at 2,681 private, nonprofit U.S. hospitals. Data came from the hospitals' 2009 Form 990s. The researchers found nonprofit hospital CEOs had a mean compensation of $595,781 and a median compensation of $404,938. Further, they found an association of higher hospital CEO compensation with higher levels of advanced technology — and no significant association between CEO compensation and the hospital's performance on quality, mortality or readmission rates.

This year will be critical for hospital and health system executives, as they navigate their organizations through the gauntlet of reform and accountable care structures. Consequently, compensation for these leaders will be under the microscope more than ever. Here are five hospital executive compensation trends to watch in 2014.

1. Expect modest compensation increases in the C-suite. This past fall, consulting firm Hay Group released its 2013 healthcare compensation survey. The results indicated median base salaries and compensation packages for hospital and health system CEOs increased 4 percent in 2013. Similarly, other surveys have shown pay increases for CFOs, COO, CMOs, CNOs, CIOs and other C-suite leaders have generally oscillated between 2 and 4 percent.

Paul Esselman, executive vice president and managing principal at executive recruitment firm Cejka Executive Search, says hospital executives should continue to expect modest pay bumps. "The increases we are seeing really reflect the slow economic recovery, and to a certain extent, the uncertainty surrounding healthcare reform," he says.

As for ballpark figures, the 2013 National Healthcare Leadership Compensation Survey, conducted by Integrated Healthcare Strategies and co-sponsored by the American Society for Healthcare Human Resources Administration, gives some clarity. Health system executives will continue to make between 1.5 and two times as much as individual hospital leaders. Executives of independent hospitals will also garner higher paychecks than leaders of subsidiary hospitals.

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.

For hospital and health system CFOs, median salaries in 2013 totaled anywhere from $203,600 for those at subsidiary hospitals to $409,000 for CFOs at independent health systems. Hospital CFOs recorded median cash compensation totals of approximately $225,000, compared with health system CFOs' totals of more than $400,000. Independent system CFOs saw their total packages as high as $460,000, according to the Integrated Healthcare Strategies data.

COOs made more than CFOs, on average, in 2013. Health system COOs had median salaries ranging from $353,400 to $447,000, depending on hospital ownership, and median total compensation varied between the mid- to high-$400,000 level. COOs at independent and subsidiary hospitals, like CEOs and CFOs, made less, but their total compensation still hovered around $300,000 on average.

2. Nonprofit hospital executives have to win back the public by example. The JAMA study left the public wondering: Why are top hospital executives not getting paid based on quality results and patient-centric measures and instead receive paychecks based on hospital prestige and technology? Isn't that the point of transitioning from a fee-for-service system to a value-based system?

Progressive hospital leaders and board members can buck the stigma if they tie more stringent, quality-based metrics to executive compensation packages.

"The disappointment was the lack of association with patient outcomes," says Ashish Jha, MD, a researcher with the Harvard School of Public Health and co-author of the CEO compensation study. "We just don't prioritize this highly enough, and the fact that CEO compensation seems to be unlinked to his/her hospital's mortality rates, for instance, is a little bit disappointing. It also says that there is a real opportunity here if boards are willing to take it on."

3. Physician engagement and value-based outcomes are the rising gold standards for compensation plans. The JAMA study focused on CEO pay from 2009, and indeed, more hospitals have started including value-based metrics in the five years since, Mr. Esselman of Cejka says.

Quality metrics are not the only emerging compensation factor. Physician alignment is viewed as one of the most important facets of hospital strategic planning today, and building a positive rapport with the physician community — as well as successfully recruiting physicians — are now affecting an executive's pay.

"As hospitals and health systems look to affiliate and incorporate physicians within their marketplace and align them to their hospital, we are seeing a portion [of executive compensation] tied to how well they integrate and collaborate with medical staff," Mr. Esselman says.

4. Groups will ensure compensation more closely falls in line with goals. Last year, many patient advocacy groups and unions pushed hospitals to improve their executive pay practices.

For example, the Massachusetts Nurses Association called for a new state law that would cap hospital CEO salaries at 100 times the lowest-paid hospital employees. The SEIU-United Healthcare Workers West also filed a ballot initiative that would prevent nonprofit hospitals from receiving more than $450,000 in annual compensation, which is approximately the same amount paid to the president of the United States. However, hospitals have argued high compensation is needed to attract qualified candidates and compete with the more lucrative private sector jobs.

These types of measures are not likely to subside. Policy experts say it would behoove hospital executives, board members and compensation committee members to adjust compensation contracts to the times and ensure transparency exists in the process.

"There is a major shift in the role of the hospital executive," says Tom Flannery, PhD, partner at consulting firm Mercer. "Their role is evolving to focus less on brick-and-mortar issues and more on building services and partnering with physicians and caregivers to create a patient-centric culture that addresses both patient-focused care and high-value outcomes."

5. Physician executives are the hot commodity. While most top hospital executives are receiving annual pay increases of 2 to 4 percent, physician executives are experiencing higher rates. Mr. Esselman says last year, physician executives received an average pay increase of 7 percent.

Gallup polls have consistently shown that physicians, along with nurses, are among the most trusted professionals. As health systems move toward accountable care structures, they too are trusting — and justly compensating — physicians willing to lead the systems to success.

"We're certainly seeing physician leaders vie for the top leadership positions within hospital and health systems, more so than we have seen in the past 10 years," Mr. Esselman says.