Modern Healthcare | 2020: Annual Executive Compensation Article

SullivanCotter helps to examine how health care organizations are adapting their executive compensation practices in response to COVID-19

As costs surge and revenue declines for health care organizations amidst the COVID-19 pandemic, many are re-evaluating their executive compensation programs as they focus on organization-wide equity, recovery and what lies ahead in such an uncertain environment.

Featured in an August 2020 edition of Modern Healthcare, SullivanCotter's Bruce Greenblatt and Tom Pavlik share data from SullivanCotter's recent COVID-19 research and highlight some of the key executive compensation changes being implemented or considered in response. This includes actions on base salaries, adjustments to current year incentives to account for the impact of the pandemic, and adjustments to future compensation programs and talent strategies to incorporate recovery considerations and ongoing uncertainty.

In order to focus on the need for financial sustainability, cost efficiencies and revenue growth, all of which have been accelerated by COVID-19, organizations should adopt a more flexible and fluid approach as they move into 2021 and beyond.

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PODCAST | Impact of COVID-19 on Physician and APP Compensation Practices

BESLER | The Hospital Finance Podcast®

LISTEN TO PODCAST

Zach Hartsell, Principal, discusses some of the results from SullivanCotter's 2020 COVID-19 Physician and Advanced Practice Provider Compensation Practices Survey on the July 29, 2020 episode of the The Hospital Finance Podcast® with BESLER.

Highlights of this episode include:

  • Background on SullivanCotter's COVID-19 survey series
  • How organizations are handling furloughs and layoffs during the pandemic
  • How cash compensation and benefits have been affected by the pandemic
  • What are organizations looking at in terms of salary protections and incentive compensation for physicians?
  • Some trends around redeployment and premium compensation for advanced practice providers

TRANSCRIPT

 

Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance Podcast®. Consulting firm SullivanCotter recently released survey results indicating that organizations are anticipating changes to physician non-productivity-based incentives in 2020. To discuss the study results, I’m joined by Zachary Hartsell, a principal at SullivanCotter. Zachary, welcome to the show.

Zachary: Michael, glad to be here. Thank you for inviting me.

Mike: Today we’ll be talking about the results of SullivanCotter’s COVID-19 Physician and Advanced Practice Provider Compensation Practices survey series. What were you looking at, specifically, in this survey? And who did you survey?

Zachary: Well, happy to discuss it, Michael. SullivanCotter has actually conducted two surveys on this topic, one in April and one in May. We conducted these survey to provide insight to our clients and to the market as to how organizations were responding to the pandemic from a workforce and total rewards perspective. Both surveys had over 100 participants, and we saw a 70% repeat in participation from the first to the second survey. Participating organizations had annual net revenue ranging anywhere from 400 million to 28 billion -  representing many of the largest integrated, academic and pediatric hospitals and health systems in the country. The goal of the survey was to understand the changes that occurred or are being considered as it relates to physician and APP compensation practices. When we think about compensation, we think not only about cash compensation, but things like incentives, premium pay, and benefits. We also wanted to understand what kind of compensation plan changes organizations were considering as a result of the different workflows in response to the pandemic, such as redeployments, closed clinics, etc.

Mike: Got it. So let’s dig into something you just said there. What are you finding organizations are doing in terms of furloughs and layoffs at this point?

Zachary: Great question, Michael, and something that we often get. Contrary to the attention-grabbing headlines, most organizations are not furloughing or laying off their employed physicians or advanced practice providers. In fact, less than 10% of survey respondents had implemented layoffs or furloughs. What we’re seeing in place of that is nearly half of the organizations are instead reducing physician and/or APP compensation or considering changes to benefit programs like retirement plans, CME, etc. For the minority of organizations who have looked at furloughs or layoffs, the consistent trend we are seeing is that organizations are focusing more on temporary furloughs rather than layoffs, which seem a little more permanent. Additionally, these changes are impacting the staff physicians and APPs more than they are the APP or physician leaders. When we look at organizations that have implemented furloughs, on average, the duration lasts anywhere from about three to four weeks. I will say, though, since our survey release, through conversations with our clients and media reports, we are seeing an uptick in the need to have, in some markets, more workforce actions like furloughs and layoffs due to the continued financial strain and the lack of patient volumes. But this really varies market by market and organization by organization. In our experience, it seems to be in part due to the pre-COVID financial health of the organization. I think this will be really important to monitor in the coming weeks and months, as we hit additional surges and/or volumes don’t return as projected. And if that were to happen, we could see an increase in the prevalence of furloughs and layoffs. Whereas if volumes return greater than expected, we are going to see more returning to work and even potentially new hiring.

Mike: That would be optimal. Zachary, how have you found cash compensation and benefits? How have they been affected?

Zachary: We’ve been seeing changes in the way organizations are handling compensation of their APPs and physicians as a result of COVID. But it’s not just the COVID pandemic, it’s also the economic fallout from that. And again, like with furloughs and layoffs, these changes are occurring with a lot of variability and are really dependent on the degree of disruption the organization has experienced and the pre-COVID financial health of the organization. Now, within this, we have seen some things that we expect, and we’ve seen some surprises. For example, one surprise was that we have not seen a lot of premium pay for physicians or APPs working in frontline areas with only 10% of organizations reporting that they’ve considered or have implemented premium pay compensation. This was something that we were expecting a lot more of. Compensation protection for physicians were expected, and we see them present. As of May, about half the organizations implemented or were considering temporary compensation floors - and this is for the non-frontline physicians. This is understandable given the continued loss of volume and the loss of patient revenue. Interestingly, though, while half of the organizations were protecting physician compensation, this number actually decreased from the April survey by about 10% - indicating that some organizations that may have offered initial protections had lifted those protections. Benefits are another area where we are seeing organizations making changes. In our May survey, about 35% had implemented or were considering changes to benefit programs such as reducing or eliminating retirement plan contributions, reducing or eliminating CME funds or time off, or reducing PTO time.

Mike: Zachary, let’s talk specifically about physicians for a moment. What are organizations looking at in terms of salary protections and incentive compensation for them?

Zachary: As I mentioned above, it really is dependent on whether they were frontline providers– and I mean ED, critical care, hospital medicine, or non-frontline. As we said, for frontline providers, we saw very little in the way of premium compensation. For the organizations that did use a premium, we have seen a bit of an interesting shift. Initially, those were all applied as a percentage increase to the shift rate. But as financial situations have evolved, the structure of those premium payments has changed to a one-time stipend or bonus. We talked about non-frontline physicians and about half of organizations having cash compensation protection for physicians experiencing a loss of shifts or productivity as a result of the decrease in elective procedures or non-emergent visits. When you break down the detail and you look at the scope of the protection, about 40% of organizations were providing about 100% of historical cash compensation protection, about 40% were protecting between 75 and 90 percent of historical compensation, and anywhere from 5-15% were protecting somewhere in the neighborhood of 50-75% of historical compensation. So there was a significant amount of protection being offered. As organizations begin a slow recovery out of the COVID crisis and as people start to think about how they reconcile the health system financial sustainability, I think that these compensation protections are going to be more in the limelight. As we said, organizations are starting to lift them a bit and I think as protections linger on, or market conditions create the need for subsequent protections, we’ll likely see that the increase of organizations requiring repayment of these – currently it’s about 22%. But as this continues on, we may see more and more organizations requiring repayment. One last thing to talk about with physicians would be the incentive component. And when we talk about incentive, nearly 40% of organizations plan to modify physician incentive plans for the remainder of 2020. When we talk about incentives, though, in this context, we are specifically talking about non-productivity incentives - things such as value-based incentives or the system-wide incentives that physicians are eligible for, not the productivity incentives that we spoke about earlier. Additionally, about a quarter of organizations anticipate making future changes to the physician compensation plan as a result of the fallout from COVID-19.

Mike: Zachary, the work of many advanced practice providers was affected by COVID-19. Tell us about the trends you saw around redeployment and premium compensation for those providers.

Zachary: Well, as we discussed earlier, Michael, this is really interesting to me, being an advanced practice provider myself. I think that this has really been one of the "aha" moments organizations have experienced as a result of COVID - and that is the value that the flexibility of the APP workforce. For example, 71% of organizations have redeployed or plan to redeploy their non-frontline APPs into frontline specialties. And I’ll tell you anecdotally, that’s not just the ICU or hospital-based units. But it’s things like COVID screening clinics, telemedicine, infectious disease, and pulmonary medicine clinics. A critical consideration for organizations looking to redeploy their APPs is ensuring that they’re redeploying the APPs with the right skill set. This is incredibly important and can’t really be overlooked. This is often best accomplished through performing an organization-wide skill inventory of your APPs. Other important considerations when thinking about redeployment include clarifying emergency credentialing policies, reviewing staffing plans, and providing training for new care delivery and documentation requirements. On the compensation side, about half the organizations have made reductions to cash compensation with the average reduction of approximately about 10%. While APP incentive programs are not as common as with physicians, in our survey, about two-thirds did say that they have incentive plans. This is higher than what we typically see. Our May survey indicated that about a quarter of them were modifying their incentive plans. When we break down the data, that was fairly evenly split between modifying the plan, reducing the plan, or eliminating the incentive opportunity altogether. I think what we’re starting to see now is organizations thinking about the future. In our May survey, about 15% of organizations anticipated making changes to future APP compensation, as a result of COVID-19, with another 47% unsure. As the pandemic continues and as there is more clarity around the financial situation post-pandemic, I suspect we’ll have more organizations making decisions about whether they will be making future changes to APP compensation.

Mike: Do you have any recommendations for organizations that are revisiting their compensation packages for physicians and APPs as a result of the pandemic?

Zachary: This really may be a crossroads for physician and APP compensation as COVID-19 will serve as a referendum on the traditional compensation programs. We imagine that there will be organizations who will use this disruption to escalate the movement away from productivity-based compensation to more performance-based compensation. I’ll tell you, though - there will be other organizations that will see this as an opportunity to double down on productivity in order to try to see a quick financial recovery. I think for all organizations the overall question is, “Can you afford to return to the old model? Or is this time of disruption a chance to reset using a different formula?” I think the challenge that most organizations will face is how to make these long-term decisions when there are still so many unanswered questions. "How long will the COVID disruptions last? What’s going to happen to telehealth and the payments? What impact will the rise of the uninsured be on organizational finances?" And something else that has not been discussed as much but will have a big impact is the impending CPT coding changes and how these changes will impact organizational finances and physician compensation in the future. As healthcare organizations attempt to plan for these uncertainties, there’s going to be a need for more efficient operating models. I think there’ll be some right-sizing of cost structures and the reassessment of organizational processes and structures to become a little more clear. I think organizations should be thinking about taking inventory as, “Do you have a clear and consistent base performance and work expectations for all of your physicians and APPs? Do you have physicians and APPs working at the top of their license and training and aligned with desired outcomes like patient access, throughput, and quality? Do you have a compensation philosophy and a model for physicians and APP that is aligned with organizational goals, that is equitable, externally competitive, efficient, and easy to administer?" And most importantly, "Is it understandable to the physicians and APPs?" A clear compensation strategy that is paired with a clearly-defined performance and clinical work expectations are the critical components that leaders can utilize to hold the clinicians accountable, differentiate performance, and in turn, compensation in the future. As the COVID-19 pandemic continues to evolve, we will continue to monitor the market and provide updates to the trends we shared here today. I think these trends are important to keep an eye on and for organizations to consider while they’re analyzing their own compensation plans and financial positions.

Mike: Zachary, if someone wanted to read more about the study results, where can they go?

Zachary: Go to www.sullivancotter.com and look under our resources page. You can also follow SullivanCotter on LinkedIn, where we regularly post compensation trends and insights related to COVID-19 and physician and APP compensation. Finally, I’m happy to answer any specific questions at zacharyhartsell@sullivancotter.com.

Mike: Zachary Hartsell, thanks so much for stopping by today and talking with us on the Hospital Finance Podcast.

Zachary: Thank you again, Michael. I appreciate the invite.


Modern Healthcare |
Pandemic May Pound Lopsided Physician Pay Model Into Shape

Will pandemic-driven changes to physician compensation affect pay programs in the long-term?

In the early days of the COVID-19 pandemic, health care organizations were faced with a number of unprecedented challenges as in-person visits were delayed and elective surgeries postponed. Many responded by having to implement pay cuts, furloughs and/or layoffs - and the physician workforce was not immune to these changes.

Featured in a July 2020 edition of Modern Healthcare, SullivanCotter helps to evaluate how these pandemic-driven changes to physician compensation programs may indeed be a sign of more significant long-term changes to come if the current surge in cases and situation continues. Despite consistent year over year increases in total compensation, according to SullivanCotter's Physician Compensation and Productivity Survey, organizations will now need to reassess physician pay models in light of recent events to help maintain operations and support future sustainability.

READ FULL ARTICLE


SullivanCotter Webinar Series | Care Team Optimization

Join us for this exclusive webinar series!

Hospitals and health systems nationwide continue to face a number of urgent financial and workforce challenges amidst an evolving global pandemic.

As organizations look for ways to increase access and manage recovering patient volumes, transform operations and ensure financial stability, focusing on the optimization of the care delivery team is imperative.


REGISTER FOR EACH OF THE 45-MINUTE SESSIONS INDIVIDUALLY BELOW:

(*Please note that these webinars are intended for health care provider organizations only)

SESSION 1: Building the Business Case for APP Optimization

Wednesday, August 19 | 12:00pm-12:45pm CT

In order to effectively optimize the care delivery team, organizations must understand both the barriers and keys to success, effective affiliation models, readiness indicators and more. SullivanCotter will also highlight real examples that show significant increases in revenue opportunity and patient visits through enhanced APP utilization.

 

SESSION 2: Data-Driven Care Model Design and Implementation

Tuesday, August 25 | 1:30pm-2:15pm CT

Designing care models with intention to help support optimization is a critical next step. During this session, SullivanCotter's overview of this process will include insight into redesign opportunities, effective change management, implementation planning and expected outcomes. Case studies will showcase real results tied to increased revenue, productivity, access and engagement.

 

SESSION 3: Compensation Strategies to Reinforce Optimization

Wednesday, September 2 | 12:00pm-12:45pm CT

In order to ensure lasting change, optimization requires strategic compensation programs to help reinforce care models, achieve organizational goals and drive desired results. This session will address the evolution of APP and team-based compensation models as well as highlight important considerations moving forward. Case studies will focus on the team-based incentive plans for primary care and specialty services.


WEBINAR RECORDING | COVID-19: Managing Human Capital and Ensuring Sustainability

Hosted by the Health Forum/American Hospital Association

VIEW RECORDING


Hospitals and health care systems across the United States face significant financial and workforce challenges resulting from the COVID-19 pandemic. As this situation continues to evolve, organizations will need to review compensation-related practices across their workforce to identify modifications required to support changes in deployment and organizational sustainability while also ensuring the wellbeing of employees and patients.

In this webinar, you’ll learn how health care organizations are adjusting their compensation practices and human capital strategies in response to COVID-19. We will present data from recent SullivanCotter research highlighting the impact of COVID-19 on related practices for executives, physicians, advanced practice providers (APPs) and other health care employees. We will also share SullivanCotter’s interpretation regarding how the human capital landscape may change key components of talent management and total rewards after the crisis subsides.

This session includes a discussion of:

  • Emerging workforce compensation practices that organizations have implemented or are considering implementing to help address the financial and operational issues related to COVID-19
  • Specific practices for physicians and APPs, such as premium pay for those on the front lines, salary guarantees for other providers, paid time off (PTO), redeployment, extra shifts and more
  • Specific practices for executives and other employees, such as emergency PTO, premium pay, deferring salary increases or implementing temporary reductions, revisiting incentive plans to reflect current situation, re-evaluating retention incentives and more
  • How changes in the regulatory landscape have already impacted or may impact decision-making around compensation practices
  • What the post-COVID-19 human capital landscape may look like

WEBINAR RECORDING | How COVID-19 Has Changed the Utilization and Deployment of Advanced Practice Providers

Cutting Edge Issues and Trends in Health Care Fair Market Value

Webinar from the American Health Law Association which features SullivanCotter's Trish Anen discussing the impact of COVID-19 on advanced practice provider (APP) utilization, deployment and compensation strategies.

VIEW RECORDING


Length: 90 minutes
Level of Difficulty: Advanced
Price: $149

Description: Historically, physicians were the sole clinical provider for most patients across the country. Over the past few decades, the rise of nurse practitioners, nurse midwives, nurse anesthetists and physician assistants (Advanced Practice Providers or APPs) have expanded the concept of a clinical provider.

The COVID-19 pandemic has required health systems across the country to redeploy APPs in various ways and, as a result, many restrictions regarding APP practice have been waived.  This webinar focuses compensation strategies for these individuals and discussed the long term implications for the effective utilization of APPs.


WEBINAR RECORDING | Designing Transitional Compensation Models During the COVID-19 Pandemic

Cutting Edge Issues and Trends in Health Care Fair Market Value

Webinar from the American Health Law Association which features SullivanCotter's Kim Mobley discussing best practices for addressing COVID-19-related compensation for front line physicians.

VIEW RECORDING


Length: 90 minutes
Level of Difficulty: Advanced
Price: $149

Description: Recently, the government issued blanket Stark waivers and Anti-Kickback guidance related to COVID-19 physician arrangements. This new flexibility is welcome news to hospitals, health systems and other organizations that have been tackling challenging physician contracting, compensation and staffing issues during the COVID-19 pandemic.

In addition to discussing the blanket waivers, the webinar will explore developing best practices for addressing COVID-19 coverage for front-line employed physicians, redeployed employed physicians and physicians providing coverage under exclusive provider arrangements.  Speakers will discuss potential regulatory landmines and fair market value strategies and considerations.


Navigating the Uncertainty of COVID-19

Considerations for the Not-for-Profit Board Compensation Committee

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The COVID-19 pandemic is impacting the not-for-profit sector in a myriad of ways. The crisis is placing an enormous strain on both financial and workforce resources by creating uncertainty on current/future revenue, employee safety and job security.

The Board Compensation Committee serves a critical governance role in organizational efforts to navigate uncertainty by advising management on talent risks, supporting a focus on the key success factors to survive and recover from this crisis, and ensuring that the executive compensation program reflects best market and governance practices.

In this article, SullivanCotter addresses some of the compensation-related issues these organizations are facing and provides a number of guiding principles for the Compensation Committee during this unprecedented time.


Practice Acquisition Strategy and COVID-19

Adjusting for the New Normal

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Since the signing of the Affordable Care Act in 2010, independent physician practices have faced a growing number of financial challenges. These challenges have been driven by a decline in reimbursement, an increase in operating expenses, the need for greater capital investment (e.g. electronic medical records), new competitors, the rise of consumerism and more. The evolving COVID-19 pandemic has surfaced several new and more urgent financial issues for physician practices as revenues rapidly decline due to the cancellation of elective surgeries, decreased patient visits and limited ancillary services.1

A recent report from Barclays PLC states that doctors’ offices have seen visits drop by 50% on average.1 This disruption has been compounded as operating costs at independent practices are difficult to scale. Debt obligations must still be met while workforce retention and compensation issues are exacerbating tensions. Perhaps the greatest variable of all is the uncertainty organizations are facing regarding the duration of the pandemic or the business model required to support a “new normal.” Due to these COVID-19-related financial implications, SullivanCotter expects a substantive increase in practice transaction and consolidation activity over the next six to twelve months. For this reason, health care organizations should have a strategy in place in order to act quickly and decisively on future acquisition opportunities.

THE CURRENT ENVIRONMENT

Global economic uncertainty across all industries is at a record high as the International Monetary Fund forecasts the sharpest downturn since the Great Depression.2 Health care organizations are not immune to this uncertainty. Furthermore, the health care outpatient sector lost 40,700 jobs in March 2020 after nearly 30 years of month over month growth.3

Never has the federal government and the Centers for Medicare and Medicaid Services (CMS) restricted hospital and physician operations as much as they have during the COVID-19 pandemic (e.g., postponing elective surgeries, canceling in-person visits, etc.).4 Although evolving reimbursement models have always presented challenges for health care providers, the rate of change is at an all-time high as evidenced by CMS’ recent telehealth reimbursement updates.

Moreover, health care organizations face significant workforce challenges regarding supply and demand as select services hit their peak while others have excess capacity. These changes are testing the ability of physician practices to adapt, but most are not built for major shocks to the system.

Traditionally, health care has been considered a recession-proof industry by having stable and consistent revenue streams through the provision of essential services. As a result, independent physician practices have generally operated with low cash reserves. Without a significant cash buffer or access to credit, the current economic reality is not sustainable for smaller independent practices. Many practices are experiencing an inability to meet payroll and other critical financial obligations during COVID-19 and employee furloughs continue to rise at an alarming rate. In combination, these factors will threaten the future of physician practices — both operationally and financially.

INCREASED TRANSACTION ACTIVITY

Given the current financial distress and long-term economic uncertainty, we expect to see a significant increase in transaction activity as practices will look for new capital partners to help ensure future sustainability. Maintaining operations in today’s evolving health care marketplace is difficult enough for independent practices. The challenge has now been compounded during COVID-19 due to delayed procedures, employee furloughs, and the urgent shift to telehealth.

Planning for post-COVID-19 recovery remains extremely difficult as practices are unable to predict the pandemic’s duration, broader economic impact, future patient habits and other critical implications. When will patients feel comfortable entering clinics again? Is there a new perspective on elective visits? Will telehealth and the associated reimbursement models be maintained? A number of important unanswered questions remain, which is causing practices to seek a financial safety net. This often comes in the form of a joint venture, strategic affiliation, or full acquisition by a larger and more financially stable organization.

DEVELOPING YOUR STRATEGY

Health care organizations with a strong balance sheet are in a unique position. The current environment represents an unprecedented buying opportunity, and financially stable organizations must be prepared to move quickly and act decisively. Organizations should develop a strategy that enables them to adapt to the evolving marketplace in real-time.

SullivanCotter recommends the following guidelines as organizations consider the way forward:

Develop a transaction team

A few immediate questions organizations may consider are:

Why do we need a team to assess new transactions? We’ve bought/affiliated with plenty of practices in the past.

  • Regardless of your organization’s experience in acquiring practices, a dedicated team is required to move quickly. Specifically, this team serves as a decision-making body where each member understands their specific roles and responsibilities — allowing organizations to take a proactive approach.

Who should serve on this team?

  • Team composition should be split between internal and external stakeholders. Internally, it is imperative to represent executive, legal, and key service line/physician leadership stakeholders. Externally, a standing agreement or statement of work should be in place with third-party valuation, legal, financial, and compensation advisors.

Where do we begin?

  • Effective leadership is increasingly important in times of crisis. A supportive executive team is required to ensure that resources are prioritized, decision-making authority exists and an effective communication process is deployed.

Understand organizational needs

A thoughtful and intentional acquisition strategy should focus on four key elements:

Regulatory Environment

  • Are all future arrangements considered fair market value and commercially reasonable for both the practice acquisition and subsequent employment arrangements?
  • Are there any anti-trust issues?
  • What is the funds flow for ancillary services, outside investments, physician compensation, etc.?

Financing

  • What are the sources of capital? Is outside financing required? What type of internal approval must be secured to access this capital?
  • What is the organization’s targeted capital structure?

Transaction Terms

  • What are the must-have elements of an acquisition? Is anything non-negotiable?
  • Has internal and external counsel approved standard language for acquisitions?
  • How is value being assessed? What assets will be considered in determining purchase price (e.g., workforce in-place, active patient charts)?
  • What protective measures and control mechanisms are in place to help govern these transactions?
  • What is the desired level of affiliation? Physician affiliation relationships run along a continuum ranging from a low level of affiliation to full practice integration/employment,

Integrations

  • What is the timeline for integration? How would an integration impact existing initiatives and priorities?
  • Who will lead the integration internally?
  • What are the technology requirements for a successful integration (e.g., consistent EMRs)?
  • How can integration occur in a way that aligns with an organization’s culture?

CONCLUSION

The health care industry is in the midst of unprecedented change, disruption and even opportunity as a result of COVID-19. In order for organizations to effectively evaluate and act upon any forthcoming transactional opportunities, a thoughtful and well-considered strategy must be in place. Planning now allows for the development of a proactive approach that is aligned with key organizational goals and objectives.

--

SullivanCotter brings unique insight into the practice valuation and physician affiliation process with an in-depth understanding of the market forces, regulatory environment and operational infrastructure required to drive successful transactions. Please contact Kyle Tormoehlen or Tom Trachtman to learn more about how SullivanCotter can partner with your organization.

Kyle Tormoehlen
Principal
303.931.1521
kyletormoehlen@sullivancotter.com

Tom Trachtman
Senior Consultant
317.442.0837
tomtrachtman@sullivancotter.com


SOURCES:

  1. Wilde Mathews, A., & Evans, M. (2020). Hospitals, Doctors Feel Financial Squeeze as Coronavirus Sweeps U.S. The
    Wall Street Journal. Retrieved from https://www.wsj.com/articles/hospitals-doctors-feel-financial-squeeze-ascoronavirus-sweeps-u-s-11585768706
  2. Lawder, D. (2020). Global Economic Downturn in 2020 on Track for Sharpest Downtown Since 1930s: IMF. Reuters.
    Retrieved from https://www.reuters.com/article/us-imf-worldbank-outlook/global-economy-in-2020-on-track-forsharpest-downturn-since-1930s-imf-idUSKCN21W1MA
  3. Evans, M. & Grossman, G. Pandemic Squeezes Profit at HCA as Fewer Patients Treated. The Wall Street
    Journal. Retrieved from https://www.wsj.com/articles/pandemic-squeezes-profit-at-hca-as-fewer-patientstreated-11587492600
  4. The Centers for Medicare and Medicaid Services. (2020). Non-Emergent, Elective Medical Services, and Treatment
    Recommendations. Retrieved from https://www.cms.gov/files/document/cms-non-emergent-elective-medicalrecommendations.pdf.

 


Addressing COVID-19: Key Considerations for the Board Compensation Committee

Enhancing Board Governance of Talent Management and Compensation During COVID-19

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The COVID-19 crisis is impacting not-for-profit hospitals and health systems in a myriad of ways. The crisis is placing an enormous strain on both financial and workforce resources by creating uncertainty regarding current/future revenue, volume, employee safety and job security. The Board Compensation Committee (Committee) serves a critical governance role in the organization’s efforts to navigate uncertainty by advising management on talent risks, supporting a focus on the key success factors to survive and recover from this crisis, and ensuring that - if scrutinized - the executive compensation program reflects best governance practices, given market dynamics and the need for Compensation Committees to move quickly.

Guiding principles for the Committee in these unpredictable times may include:

  • Relying on sound business judgment and discretion in compensation decision-making by considering organizational finances, employee health and safety, broader workforce impacts (e.g., furloughs, layoffs), talent risk and burnout, local and industry market responses and competitive market positioning.
  • Basing decision-making on the organization’s specific circumstances with due consideration of market practice intelligence and optics.
  • Being flexible to adapt to a dynamic and fluid environment that will continue to evolve over the coming months.
  • Considering the organization’s compensation strategy and the short/long-term impact of major changes to the compensation program in response to the crisis.
  • Defining key success factors for managing through this crisis, and anticipating the post-crisis changes to strategic and operating priorities, in preparation for discussions on incentive plans that may no longer have relevance due to the disruption caused by COVID-19.
  • Balancing internal and external perceptions of compensation decisions, especially if the organization is receiving financial assistance and/or implementing furloughs/layoffs, with the need to honor previous compensation commitments.
  • Mitigating any immediate key talent risks while maintaining a long-term focus on talent retention and
    succession planning.
  • Ensuring transparency to the full Board on any compensation actions taken during the crisis.

SUCCESSION PLANNING

If within the Committee’s purview, consider the development of an emergency succession plan that identifies the individuals who can serve as interim replacements for key executives who may require an extended quarantine period or experience severe burnout. It is also important to consider whether the current succession plan requires any changes given the emerging organizational challenges as well as the skill sets and qualifications of the current candidates. The crisis will allow for the identification of individuals who are stepping up and exhibiting leadership, which will help to inform the Committee’s succession planning efforts. Prepare for a longer-term review of the talent strategy that will be needed to adapt to and thrive in the post-COVID-19 environment as strategic priorities shift and operating models change.

COMPENSATION DECISIONS DURING COVID-19

The Committee should consider the competitiveness of total compensation while also evaluating retention risks. This requires a facts-and-circumstances approach when evaluating potential compensation reductions. If a long-service executive’s total compensation is high relative to the market with limited variable compensation, the impact of a salary reduction is much different than in a situation involving a short-service executive with below-market compensation and higher variable pay (with incentives unlikely to be paid).

Consider market intelligence on COVID-19-related compensation practices of similarly-situated organizations. To date, the not-for-profit health care sector’s actions related to temporary executive salary reductions, increased deferrals and salary freezes have been modest compared to the more aggressive approach of publicly-held companies. These practices are subject to change as financial challenges increase and the impact on the health care workforce continues to evolve.

A major focus area for the Committee is the annual incentive plan given the economic uncertainty facing hospitals and health systems. Since incentive plans can be helpful in focusing executives on key priorities, rather than suspending or eliminating the plan, give consideration to a more discretionary and flexible approach to performance measurement. This may include re-setting goals, assessing performance pre- and post-COVID response, eliminating irrelevant goals, and/or including measures that focus on restarting the organization and near-term recovery. If utilizing a discretionary approach, guiding principles should be established to help inform decision-making. In some cases, the Committee would be well-served to delay the finalization of incentive measures and goals for forthcoming incentive plans until there is less organizational and market uncertainty. The timing of the conclusion of the performance period will impact the Committee’s options. Those with calendar year-ends may have more time to plan.

While most organizations have not taken any action to date regarding long-term incentive plans (LTIPs), we expect that, similar to annual incentive plans, the negative financial impact and potential reassessment of strategic plans will impact future goal setting and LTIPs that are already in place. As some organizations are considering postponing the implementation of new LTIP cycles, most are waiting until the crisis starts to subside before making any decisions on these plans.

Given the number of new and emerging financial challenges, the Committee should explore actions that will help to control costs without creating significant talent retention risks or sending unintended messages to the workforce. In addition, such actions need to be assessed in light of any implications related to employment agreements and 457(f) and 409A deferred compensation rules.

If your organization is considering loans and loan guarantees available under the CARES Act or the Main Street Lending Program (as available to not-for-profits), assess the required compensation restrictions and their implications for executive and physician recruitment and retention for individuals with CY 2019 total compensation exceeding $425,000.

ACTIONS FOR ENHANCING RECOVERY POST-COVID-19

After addressing issues requiring immediate attention, the Committee should consider actions for enhancing organizational recovery. The definition of performance in the new environment post-crisis continues to evolve, and it may be appropriate to refine the way organizational and individual performance is assessed. The Committee should work with management to define both short and long-term goals required to support recovery (e.g., cost reductions, financial stability, workforce engagement, care redesign) and, if appropriate, include these in incentive plans. Given changes in the delivery model, it may be time to assess organizational structure, spans of control and the scope and definition of various executive roles. Underlying all these actions is the need to identify critical talent and update succession plans and talent management strategies.

COMPENSATION COMMITTEE GOVERNANCE

The Committee should review approval procedures and processes and modify if necessary to ensure critical executive and physician compensation arrangements can be acted upon in a timely fashion. The Committee should consider adjusting its calendar to include more regular discussions on compensation and talent implications over the coming months since the environment is dynamic and circumstances are rapidly changing. If virtual Committee meetings are being considered for the first time, the General Counsel should ensure the desired method is acceptable under state law.

PHYSICIAN COMPENSATION

The Committee should review approval procedures and processes and modify if necessary to ensure critical executive and physician compensation arrangements can be acted upon in a timely fashion. The Committee should consider adjusting its calendar to include more regular discussions on compensation and talent implications over the coming months since the environment is dynamic and circumstances are rapidly changing. If virtual Committee meetings are being considered for the first time, the General Counsel should ensure the desired method is acceptable under state law.

MOVING FORWARD

Although the future is uncertain, an active and focused Compensation Committee will help to ensure that the organization can retain, manage and develop highly effective individuals for key roles who can lead the way in the post-crisis world. The market dynamics around executive compensation are very fluid. Any major program design changes should be carefully considered before implementation as this may impact leadership retention, recruitment and succession planning initiatives in an environment where exceptional health care leaders will be highly sought after.


INFOGRAPHIC | COVID-19 Executive and Employee Compensation Practices Survey

May 2020 - Market Response to COVID-19: Executive and Employee Compensation

Health care organizations across the United States continue to face a number of unprecedented challenges due to the COVID-19 pandemic. As the crisis evolves and the industry makes plans for financial recovery and operational transformation, many changes are expected that will, in turn, affect the workforce and cause additional disruption in an already uncertain environment.

SullivanCotter’s COVID-19 Executive and Employee Compensation Practices Survey series, which includes information from more than 110 leading hospitals and health systems, highlights the compensation and workforce-related actions organizations are currently implementing or considering in response.

We expect that workforce practices will continue to evolve. In order to keep health care organizations up to date on emerging trends related to COVID-19, we will monitor developments in real time.

Please note: Data reflect responses as of early May 2020.

You can also view the April 2020 data as a point of comparison.

VIEW INFOGRAPHIC

 


INFOGRAPHIC | COVID-19 Physician and APP Compensation Practices Survey

May 2020 - Market Response to COVID-19: Physician and APP Compensation

Health care organizations across the United States continue to face a number of unprecedented challenges due to the COVID-19 pandemic. As the crisis evolves and the industry makes plans for financial recovery and operational transformation, many changes are expected that will, in turn, affect the workforce and cause additional disruption in an already uncertain environment.

SullivanCotter’s COVID-19 Physician and Advanced Practice Provider Compensation Practices Survey series, which includes information from more than 100 leading hospitals and health systems, highlights the compensation and workforce-related actions organizations are currently implementing or considering in response.

We expect that workforce practices will continue to evolve. In order to keep health care organizations up to date on emerging trends related to COVID-19, we will monitor developments in real time.

Please note: Data reflect responses as of early May 2020.

You can also view the April 2020 data as a point of comparison.

VIEW INFOGRAPHIC