In an article for Healthcare Executive, Don Seymour, Kevin Talbot, and Chad Stutelberg share their insight on developing compensation strategies that link executive and physician compensation models to acute care outcome-based payment methodologies.

1. Governance Insights
Linking Compensation
to Payment Incentives
A new challenge for healthcare.
Though healthcare is in the early
stages of transitioning from volume
to value, senior leaders need to begin
working with their boards in devel-
oping compensation strategies that
link executive and physician com-
pensation models to acute care out-
come-based payment methodologies.
In the future, acute care service
providers must assume they will be
paid less per increment of service
and challenged to assume greater
risk in their traditional business as
volume shifts from inpatient to
ambulatory venues. Eventually,
population health management
payment methodologies will be
implemented in most markets. As
this transition takes place, provider
cultures will be challenged:
Everyone will have to do more with
less, moving away from the hospi-
tal-centric model and embracing a
patient-centric approach.
Healthcare leaders must link compen-
sation for senior executives and physi-
cians to new reimbursement
methodologies that will emphasize
various forms of payment based on
outcomes. Current incentive plan met-
rics tied to quality, safety, efficiency
and satisfaction scores are a step in the
right direction but insufficient for the
rapid transition to narrow networks
and the longer-term movement to
population health management.
How this will be accomplished is
not something we can answer
today, but we are working on the
challenge with our clients and
through our own research initia-
tives. As we approach this issue, we
are asking the following questions
and encourage readers to do the
same and include board members
in these discussions:
• Are commercial payors in your
state or region actively develop-
ing narrow networks based on
acute care outcomes? Are they
introducing population health
products? How do you expect
this will change over the next
three to five years?
• How do your current acute care
outcomes compare relative to
your competitors locally?
Statewide? How do they com-
pare to best practices nationally
for similar providers? What will
it take for you to move to the
level of a best-practice
organization?
• If you have a health plan, how
many lives do you cover? What
portion of your volume is
represented by the health plan?
How do you gauge success?
• If you are participating in a
Medicare ACO (defined here as
Medicare Shared Savings
Program and differing from
acute care performance con-
tracts with bonuses linked to
volume-based outcomes), how
do you measure wellness? How
do you measure prevention?
• How do you expect Medicaid pay-
ment in your state to evolve regard-
ing at-risk, acute care contracts?
Population health contracts?
• How do you link physician
compensation to the organiza-
tion’s metrics for at-risk, acute
care contracts? What portion of
savings is passed through to
physicians? How much money,
as a percentage of total pay, is
reserved to reward success?
How does the money flow?
• How do you get community phy-
sicians engaged in transforming
healthcare? How do you engage
employed physicians?
We have posed these questions in the
present tense, but we believe the real
challenges lie ahead, not just in
Reprinted from
Healthcare Executive
JULY/AUG 2014
ache.org
58

2. managing the organization to the met-
rics, but also in tying executive and
physician compensation to the results.
The Challenge of Paying
Executives
The transformation of healthcare
from volume to value presents new
challenges in how to pay executives
that fall into three main categories.
First, jobs are changing enough that
the old pay benchmarks don’t always
apply. For example, health systems
pursuing ACO initiatives need exec-
utives with skills and experience in
managing the health of populations
and associated risks—skills not gen-
erally found in traditional hospital
systems. To fill the gap, executives
are being recruited from health
plans, which often have very differ-
ent compensation structures and
programs, with higher incentive
opportunities and very specific goals
and measures used to determine
awards. Some hospitals are getting
into new businesses, selling their
expertise in supply chain, IT or
practice operations, or managing
hospitals they don’t own directly.
Nonprofit hospital compensation
programs and incentives are not
designed to support start-up ven-
tures. To be competitive on total
compensation for such positions,
and to reward the right behaviors,
organizations may need to look
toward compensation practices from
other industries.
Second, the old concept of how
much an executive is worth is being
challenged. Currently, salaries are
higher at organizations with greater
net revenues, while incentive awards
for factors such as patient
experience, quality outcomes, cost
reduction and community health
represent only a small portion of
total pay. When reimbursement is
based on providing higher quality
care at the same or lower cost, exec-
utive pay programs will need to
reward executives for success in
those areas, not for continuing to do
what they’ve been doing.
Third, the transition from volume to
value will take place over several
years, beyond the horizon of most
incentive plans. Organizations must
explore ways to link incentive pay to
long-term objectives, either by
implementing a long-term incentive
plan, or by keeping the annual plan
focused on short-term goals that
support long-term strategic change.
These are steps senior management
can work on with the board now
to prepare for the future:
• Each year the CEO should
review with the board incen-
tive plans and programs,
and update goals and metrics
to ensure they continue to
measure what’s most
important.
• Link the strategic planning pro-
cess and the incentive plan
process.
• Get better at setting goals,
defining success and measur-
ing it. Use a disciplined pro-
cess and allow enough time to
create viable baselines.
Reprinted from
Healthcare Executive
JULY/AUG 2014
ache.org
59

3. • Measure and control costs in the
physician practices.
• Have the right data systems in
place and get physician buy-in
and involvement into using them.
The need to develop compensation
strategies to pay executives and physi-
cians appropriately under at-risk, acute
care contracts is immediate in most
markets. Although the transition to
population-based contracts may evolve
over time and consequently seem less
urgent, we believe healthcare providers
should think about the longer term
and population health management as
they work on linking executive and
physician compensation models to
acute care, outcome-based payment
methodologies. s
Don Seymour is execu-
tive vice president and
practice leader, gover-
nance and strategy prac-
tice, INTEGRATED
Healthcare Strategies,
Kansas City, Mo., an
adviser to The
Governance Institute
and an ACHE Member.
He can be reached at don.
seymour@ihstrategies.com.
Kevin C. Talbot is exec-
utive vice president, exec-
utive compensation,
INTEGRATED
Healthcare Strategies, and
an ACHE Member. He
can be reached at kevin.
talbot@ihstrategies.com. Chad
Stutelberg is executive vice president,
physician compensation,
INTEGRATED Healthcare Strategies.
He can be reached at chad.stutelberg@
ihstrategies.com.
Stutelberg
Talbot
Seymour
• Encourage the board to use
external data to benchmark
CEO performance and to vali-
date if the organization is get-
ting the expected performance
at the level of compensation.
• Learn and improve.
The Challenge of Paying
Physicians
As healthcare moves from volume to
value, a number of factors that will
impact physicians, their practices
and their compensation will need to
be addressed.
Under ACO models, the leadership
structure changes. Organizations need
to develop clinical leadership and
encourage clinical and administrative
collaboration. Organizations need to
determine if they have the right physi-
cian leaders, and develop, train and
compensate them appropriately for
providing these types of services.
To be successful, the hospital or sys-
tem, physicians and health plan must
be fully integrated to manage patients
and the risk payments associated with
their care. How these organizations
are structured and how they handle
and distribute risk contracts among
the entities and share payments with
physicians (independent or employed)
will be critical.
The shift to ACO models will
require an extensive investment in
enterprise EHR systems. The devel-
opment of new healthcare delivery
models, such as care managers, med-
ical home models, multidisciplinary
and specialty clinics, and telemedi-
cine, will require significant invest-
ments as well. These changes in IT
and the clinical delivery of care will
have a major impact on physicians,
their practices and their income.
Managing the transition to new mod-
els and managing their impact on
physicians are among the biggest chal-
lenges that organizations will encoun-
ter. Typically, physicians are presented
with mixed messages: They need to
manage the care of patients and keep
them out of the clinic or hospital, but
still need to be productive and gener-
ate fee-for-service income. This
dichotomy is unsustainable long term;
the transition can be brought about
over time, but not a long time.
The following are strategic initia-
tives that CEOs and boards of every
organization should consider to help
in this transition:
• Measure and pay for quality out-
comes now; you need to start.
• Determine how you will value
and pay for the supervision of
staff, and for work on non-reve-
nue generating activities like tele-
medicine and care coordination.
• Participate in a risk sharing
agreement. This will help you
“get your feet wet” by working
with a small contract first.
• Identify physician leaders and
get them engaged in working on
quality initiatives. Put a training
program in place to help them
be successful.
• Develop a strategy for physician
recruitment and staffing to
ensure you can meet the clinical
needs under an ACO model.
Governance Insights
Reprinted from
Healthcare Executive
JULY/AUG 2014
ache.org
60