And, even better, help shape an organization's HR strategy
Healthcare reform continues to shine a spotlight on healthcare provider performance. Under the Patient Protection and Affordable Care Act, CMS may withhold a portion of reimbursements from providers based on their year-over-year improvement in performance against key quality metrics, relative to their national peers. We anticipate that private insurers will eventually follow suit.
Organizations are thus in a race against time and each other to improve quality outcomes, while contending with new business competitors in an ever-more-challenging operating environment, with an aging population, increasing prevalence of low-margin chronic-care conditions, and fast-paced clinical and technology improvements. Meanwhile, they face the same cost pressures as all organizations in all industries.
Healthcare organizations have long been blessed with a wealth of data they can use to analyze how to improve performance. A key difference in this new dynamic is the need to analyze relative performance.
Relative performance is not new to healthcare. Patient satisfaction has long been measured on a relative basis. And the measures agencies use to establish bond ratings not only evaluate the organizations' fiscal health, but can be used to measure performance on a relative basis. Compensation levels are often set relative to market levels. What is new is the organizations' recognition of the top-line interdependencies of the relative performance metrics — and their interest in linking these metrics to performance-based variable pay decisions.
This interest in linking metrics to pay is generated from multiple sources, notably:
- Healthcare provider organizations increasingly recruit key talent from the for-profit sector who bring with them the expectations and skills to apply the same rigorous analytics routinely employed in publicly traded companies. Board members are happy to be able to rely on these more rigorous analytics to support their expanding board responsibilities.
- Media scrutiny and stakeholder interest in executive compensation levels, as reported by tax-exempt organizations on IRS Form 990s, continue to grow. Being able to set pay levels relative to performance is more defensible and motivates executives.
While public companies can review the relative alignment of pay with total shareholder return, how can healthcare organizations accomplish a similar analysis? The answer lies in value-based purchasing metrics, which can help demonstrate the relative alignment of executive pay with the performance measures deemed critical under healthcare reform, as compared to a peer group. This analysis can:
- Select and prioritize which of the over 200 CMS measures to include in incentive plans
- Align executive incentive plans with performance management measures across all levels of the organization
- Set performance-level targets
- Determine whether to bundle several measures into a scorecard
The VBP model can be used more broadly to define the link between business strategy and people by benchmarking financial and quality results relative to peers. It can help demonstrate, quantify and validate the impact the organization’s operational, employee, customer and financial drivers have on one another and, ultimately, on stakeholder value. The ability of these various levers to influence organization performance can help an organization prioritize key areas of focus and establish a business-focused foundation for its HR strategy. This strategic framework can ensure that all HR programs, not just compensation programs, support the organization's strategic and financial objectives.
Lisa Perlmutter is director at Towers Watson. She can be reached at lisa.perlmutter@towerswatson.com.
Russ Wilson is a senior consultant at Towers Watson. He can be reached at russ.wilson@towerswatson.com.
Susan Sulisz is a director at Towers Watson. She can be reached at susan.sulisz@towerswatson.com.