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Using Executive Incentive Pay to Bridge the Gap to Value-Based Care

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Kevin Talbot, executive vice president and practice leader of total compensation and rewards at INTEGRATED Healthcare Strategies, explains how executive incentive pay can help align goals in the new value-based healthcare environment.

Question: You describe healthcare as moving from "the first curve to the second curve." Could you explain what this means?

Kevin Talbot is executive vice president at INTEGRATED Healthcare Strategies.Kevin Talbot:
The concept of moving from the first curve to the second curve is based off a study the American Hospital Association published recently. It defines the need for healthcare to move from the volume-based model to a value-based model. That's the basic concept behind it. It's about going from volume to value in terms of how hospitals and healthcare organizations care for patients and are reimbursed. It's central to strategies they are looking at now.

From that study, hospitals come away with a number of must-do strategies: clinical-hospital alignment, quality and patient safety, integrated information systems, engaged employees and physicians. Based on our experiences at INTEGRATED Healthcare Strategies, those are the strategies we hear our clients talking about most at board meetings.

Q: How does incentive pay fit into this conversation, and is it hard for hospitals and health systems to move toward value-based care pay models when they are still being paid based on volume?

KT:
We have the opportunity to influence or help organizations align pay with those strategies. My observation has been that most incentive plans in this day and age still have metrics that focus on that first curve — the volume-based model. We need to bridge that gap to a value-based model. Some organizations are doing it well, but many are still focused on that first curve.

Q: So how can modifying incentive pay within a hospital executive's compensation plan help bridge that gap? What should incentive plans look like to make sure executives are focused on value-based healthcare?

KT:
Almost all hospitals and health systems have performance-based pay. A vast majority, 80-85 percent, has a short-term incentive plan. Long-term incentive plans, those that have goals for a three-year time frame on average, you see in only about 25 percent of hospitals. Using a combination of short-term incentives and long-term incentives is one approach that we find very successful. Short-term incentives can be designed to focus on operating in the current healthcare system that still pays hospitals primarily for volume. Long-term incentives can be designed to focus on executing the strategies needed to prepare for a value-based economic model.

The most common strategies for measuring performance in the short term, or one-year time frame, are: financial performance, almost always measured by operating margin; clinical quality, measured by compliance with CMS' core measures; and patient satisfaction. Those are the three areas measured most frequently, and they are critical to successful operations today. When you look at strategies for moving to the second curve, or value-based care, you see incentives based on clinical-hospital alignment, employee and physician engagement and care models that keep patients out of the hospital as opposed to filling beds in the hospital. These types of goals are best-suited for long-term incentive plans.

Q: What are some hard figures and benchmarks you can provide for hospital executives and their boards as they shape these newer incentive plans?

KT:
Typically, for an annual incentive plan, CEOs may receive an incentive that is 30 percent of base salary. To achieve that fully, they need to meet certain criteria. In terms of how much of that 30 percent is based on financial versus clinical, 40 percent or less should be based on financial. A majority should be based on clinical quality, patient safety and patient satisfaction.

Ultimately, the specific metrics used in any organization's incentive plans need to be based on the strategic plan. However, there are some emerging metrics that can be applied across most hospitals and health systems. I mentioned the importance of measuring physician engagement levels, since hospital-physician alignment is central to most value-based care models. Other measures include eliminating preventable errors that cause harm, reducing hospital-acquired infections or falls, getting a certain number of lives covered in an accountable care model or patient home model, reducing preventable admissions, having a certain percentage of patient care decisions based on evidence-based protocols or care models. Those are just a few examples I've seen that are innovative and forward-thinking.

Organizations that do this well are not just measuring against themselves. They are comparing their performance to their peers and making sure incentive-based pay reflects that level of performance. For example, their [institutions] may improve this year, but are they improving slower or faster than everybody else? If you're going to pay executives incentives that put their pay in the 75th percentile, hospitals need to be able to demonstrate that their performance is also at that 75th percentile.

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