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E-Briefings – Volume 13, No. 1, January 2016

Welcome to The Governance Institute’s E-Briefings!

This newsletter is designed to inform you about new research and expert opinions in the area of hospital and health system governance, as well as to update you on services and events at The Governance Institute.

Click here to download the full PDF version.

Healthcare Forecast for 2016: Top Trends Driving Board Priorities

This year will be notable for the risks and opportunities associated with market change and strategic activity that will continue through this significant election year. In this article, Steven T. Valentine and Guy M. Masters list 10 trends where boards should direct their attention in 2016, and invite boards to consider the potential impacts these trends will have on their organizations.

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By Steven T. Valentine and Guy M. Masters, Premier, Inc.

2016 will be notable for the risks and opportunities associated with market change and strategic activity that will continue throughout this significant election year. As the Obama era comes to a close, healthcare can expect further change and uncertainty. Although the ACA and value-based payment is now woven into the healthcare industry fabric, the tapestry is still constantly evolving. These 10 trends are where boards should direct their attention in 2016.

1. Physician–Hospital Alignment
This trend continues at the top of the list for 2016, as it has been for the past few years. Many hospitals and health systems have already undertaken aggressive steps to engage physicians as partners with aligned financial and clinical incentives. Current estimates are that hospitals employ between 50 to 60 percent of practicing physicians, with mixed financial results. Many hospitals and health systems report losing in the range of $150,000 or more per employed physician. In spite of this, we expect that physician integration models will continue to grow in 2016, including through employment, alignment models (e.g., clinically integrated networks [CINs], contracting networks, accountable care organizations [ACOs], bundled payment, co-management agreements), and other creative arrangements.

Also, in 2015, the Medicare Access and CHIP Reauthorization Act (MACRA) was enacted to replace the sustainable growth rate (SGR) formula for physician payments for Medicare fee-for-service patients. Guidelines will be issued this year outlining requirements for quality reporting and performance measures that will determine physician payments beginning in 2019. However, physician performance tracking begins in 2017. It is essential that physicians (and hospitals that employ or are aligned with them) understand the payment model options available, and the associated financial and operational implications. Their financial future depends on it.

    In the boardroom:

  • Develop an executive and physician action plan to understand and assess options, impacts, and risks to employed and independent physicians from anticipated MACRA value-based payment changes.

  • Do you know the economic status and impact of your employed physicians? Is there a plan in place to reduce and minimize the losses on owned practices?

  • Is individual physician performance tracked (and acted upon) using cost, quality, satisfaction, and clinical effectiveness data and measures? Are the metrics being shared with physicians on a timely basis?

  • Is effective physician leadership embedded in key impact areas of your organization, including governance, C-suite level, departments and service lines (e.g., co-management administrative structures), IT (informatics, decision support), clinical integration and redesign committees, and other important areas? Ensure that physicians are leaders in the change management process.

2. Population Health Management
No matter what the size or location of the market, nearly every hospital/health system strategic plan we’ve seen this year includes goals and strategies regarding population health management (PHM) built upon value-based care models and payment arrangements. This makes sense considering that key elements of healthcare reform incentivize delivering and reimbursing patient care based upon value. The drive toward capturing “defined populations” will continue with vigor into 2016. The populations most suited for a PHM model of care are primarily Medicare, Medicaid, and Workers’ Compensation patient segments (and on a smaller scale a hospital’s own employee base) and now commercial arrangements and direct contracting. Effective PHM requires critical mass, big data, and sophisticated data analytics to address claims analytics, patient profiles, business intelligence, and patient engagement issues. Make no mistake, creating an infrastructure to implement effective PHM is an expensive proposition. Many organizations that are serious about PHM and accepting more risk are sharing infrastructure costs by forming or joining CINs. Some CINs are now developing and implementing “super CINs,” which include multiple CINs on a broader geographic basis. These have the benefit of creating larger critical mass, expanding their geographic footprint, and sharing costs across multiple members.

Under the PHM umbrella, we also expect CMS to further expand the bundled payment program beyond the mandated 68 geographic areas announced in 2015 as part of the five-year Comprehensive Care for Joint Replacement (CJR) program.

    In the boardroom:

  • Are you participating in bundled payment programs and models? We believe that CJR is just the tip of the iceberg and CMS will expand bundled payment to additional episode of care areas and geographies. If this is the case, what more should you do to anticipate and respond?

  • Are your key and relevant physicians on board with aligned economic and clinical incentives to make the program successful?

  • Are you utilizing additional strategies such as co-management agreements for key service lines to further prepare, train, and engage your physicians?

  • Are you building or part of a CIN, and is it creating the results you expect? Is there a “super CIN” in your future?

  • Are there other populations (e.g., commercial or direct-to-employer) you can reach out to and include in bundled arrangements for their benefit?

3. Patient Volume
Volumes should trend upward as more people have insurance, the economy continues to grow slowly, and Medicaid expansion takes hold. Additionally, the aging of the population and increase in both obesity and chronic diseases will create pressure for utilization to increase. Health plans and providers will push back against utilization increase through health plan payment methods that have incentive features focusing on shared savings and value-based performance. The continued emphasis on reducing readmissions, focused efforts on potentially preventable conditions, and use of observation services vs. admission will also slow down the admission increase. New care models in bundled payment, co-management, ACOs, patient-centered medical homes (PCMHs), chronic disease management programs, and specialty medical homes should also slow volume growth. More effective use and performance of hospitalists, case managers, chief medical officers, and use of hospice and palliative care will also slow the growth rate. In most markets, emergency department volume is still strong for the significantly ill and will increase, despite the explosion of alternatives such as retail clinics, urgent care centers, minute clinics, PCMHs, and other ambulatory care sites, which will decrease the non-emergent visits.

    In the boardroom:

  • Track care model changes that reduce inpatient utilization and increase post-acute and ambulatory care use.

  • Should you consider lower cost alternative sites to treat the chronically ill and the non-emergent patient?

  • Pay attention to payer mix changes due to healthcare exchanges and Medicaid expansion as it occurs in many states, and corresponding increases in bad debt.

4. Consolidation, Alliances, and Affiliations
Industry consolidation should continue with larger transaction amounts and more broadly defined. The December 2015 acquisition of Target's pharmacy and retail clinic business by CVS Health for $1.9 billion and its aggressive expansion into the population health business (e.g., pharmaceuticals, chronic disease, minute clinics, and other retail health services) are evidence of this trend. The increasing investment by private equity into the urgent care and retail clinic operations is also evidence of this growth and potential acquisition and “roll-up” of operators, all which are attempting to disrupt the traditional healthcare market. Consolidation and roll-up will be focused on elimination of duplication of overhead, recognition of winners and losers in this space, and inevitable fall-out of low-volume performers with an underperforming ROI.

A major driver of hospital and health system mergers or sale is the need to access capital. Bond rating downgrades still outnumber upgrades. Physician organizations will continue to sell to larger organizations to gain access to capital, obtain superior IT systems, access proven managed care models, and enhance infrastructure. Ambulatory providers and post-acute care providers will also seek partners as they see their referral sources change and redirect volume. Health systems will seek to control the continuum of care. All of these efforts will be focused on providing greater value to the patient and the payer.

    In the boardroom:

  • Monitor transaction and potential disruptive activity in your service area and region to identify trends impacting post-acute care, ambulatory care, and telehealth services. What impact will these have on your approach to the entire continuum of services that you need to provide?

  • Also monitor types of affiliations that are occurring and assess their impact on your hospital/health system. We expect to see more affiliations around clinical service lines and specific programs versus typical whole-entity mergers. Are there threats or opportunities for your organization and physicians from these types of alliances?

  • What new innovations and non-traditional opportunities are being explored that will provide diversity in sources of revenues and volume (patient and non-patient related)?

5. Public/Private Exchanges and Health Plans
Public insurance exchanges will have modest growth during this current enrollment period. The growth in public exchanges should come in the HMO product, which offers narrower networks and better control of resource consumption. Because it is an election year, politicians will apply pressure to limit narrow networks and look to offer the public exchange to the undocumented population (without subsidy—that will follow in 2019 with a state provided subsidy). Efforts will be made to add transparency to the public exchange Web site.

Private insurance exchanges will grow some in 2016. The private exchange will look a lot like the public exchange, less the public subsidies. Look for growth in high-deductible PPO products and a continued slide in commercial HMO as consumer-driven health plans continue to grow.

Health plans will consolidate in order to eliminate overhead and exert greater market power over providers and drug companies. The health plans will also acquire companies in order to access new proven primary care models, new payment systems with incentives, and managed care knowledge transfer.

    In the boardroom:

  • Pay attention to the formation of narrow networks that exclude your physicians and organization. What threats do they pose, and what alternative responses should be considered?

  • Proactively work with brokers and employers in the community to develop value-based payment models as private exchanges emerge.

  • Explore the options, including the development of new value-based payment models, and measure the impacts of additional partnerships and alliances with health plans in your community (and beyond).

6. Information Technology and Security
As noted earlier in the population health management trend, IT is at the heart of future success with nearly every payment and care delivery aspect associated with healthcare reform, the ACA, and value-based reimbursement. Many hospitals and health systems will continue to invest in IT to an equal or greater extent than physical facilities. IT systems themselves are evolving, requiring upgrades, outright replacement, and expansion of capabilities to meet ever-changing needs. As multi-system alliances and mergers occur, common IT platforms are adopted requiring capital investments. Still in the future are IT systems and platforms with the capability and functionality to achieve higher levels of interoperability—to collect and integrate data from multiple sources of patient information (e.g., from retail clinics, ambulatory service providers, ED, physicians, telehealth, post-acute, and others). Add to your 2016 IT checklist capabilities to provide patient portals and registries, a data warehouse linking data across the continuum, telehealth, and patient access to their medical records (anywhere, any device, any time) in sub-second response time.

Expect to see enormous security, privacy, and data breaches in hospitals and health systems that will require a new level of risk management. Experts warn that many systems are vulnerable, and the huge breaches that we’ve seen in related industries foreshadow the future.

    In the boardroom:

  • Do you have board members who have a background in security and privacy? Aggressively monitor IT security, and identify/address risks associated with potential breaches of your systems.

  • Request specific evidence that your IT expenditures and systems show tangible as well as intangible “returns on investment.”

  • Goals for IT must be defined—assess them in terms of outcomes (e.g., evaluate the impact on care teams to be more efficient; identify care gaps to improve population health; improve PQRI results; and help primary care physicians to handle larger patient loads).

7. Consumerism
Consumerism is growing and is being broadly defined, especially as consumer-driven health plans grow across the country. The focus of this trend in 2016 is for hospitals and health systems to gain “stickiness” with the consumer. Efforts to drive the public to big-box retail clinic sites, urgent care, consumer Web portals, Web sites to buy insurance and select a provider, use mobile health apps (over 40,000 available), a health system-owned health plan, and direct advertising all come into play. Health systems should be expected to throw a broad net to offer as many access points as possible. More Web sites will pop up offering consumers more information and help with selection of health plans and providers, and to identify lower cost locations for care as the consumer becomes more responsible for a greater percentage of the healthcare costs.

    In the boardroom:

  • What index level of “stickiness” do you currently have with consumers and patients (overall and from specific market segments)? Identify what strategies work best to attract and draw in specific segments of consumers through patient physician portals, interactive Web sites, and services.

  • What techniques are you using to engage consumers in their healthcare decisions and helping consumers take greater responsibility for their health (and related decisions)?

  • Monitor levels of consumer access to Web sites and portals to better understand and refine your market segmentation strategy by specific payer type, especially from patients in exchanges, Medicaid, Medicare Advantage, PPO high-deductible plans, and others. Are you using tailored strategies to effectively address the needs and interests of targeted groups?

  • Assess how other organizations are effectively targeting specific market segments and learn from their experience (e.g., Oscar Health targets young, healthy, tech-savvy consumers; Oscar boasts a five-minute enrollment time, with transparency about providers, costs, etc.).

8. Transparency and Integration of Social Media
Transparency will continue to increase through quality and outcomes reporting Web sites, as well as through social media outlets. Social media is a wild card that must be played, and watched vigilantly. A single viral event (negative or positive) can be game-changing. Health systems and hospitals should continue to monitor Web sites (currently more than 40) that report quality, price, and other comparative information. Patient-reported experience and outcomes data will become more accessible and will be incorporated into how quality of care is measured. With a growing amount of revenue at stake, hospitals will focus more attention on strategies to improve their patients’ perceptions of their hospital experience and boost their HCAHPS scores, and physicians will seek to improve their PQRI indicators. Health plans will increase their own transparency efforts regarding providers in their networks.

    In the boardroom:

  • Monitor social media and proactively respond to social media events in a timely, transparent way.

  • How is your organization using social media to communicate with the community and patients?

  • Make sure that your organization is vigilant at reporting accurate quality and price information and be proactive in these efforts.

  • Ensure that plans are in place to monitor and improve HCAHPs and PQRI performance.

  • Monitor reports of quality and pricing of competitors.

9. Care Model Redesign and the Next Level
Care models will continue to evolve resulting in higher quality and lower cost, thereby improving value, especially on a per capita cost basis. The development and expansion of bundled payment, ACO, PCMH, specialty PCMH, and post-acute care continuum should continue at a robust pace. The development of these areas will be negatively impacted by limited supply of appropriate human resources, information technology investment, and lagging of new payment models and systems to drive and measure physician behavior change.

Health systems will continue the march toward population health in selected communities (those geographic areas) where they can make a difference. Getting different IT systems to work together in this space will remain a challenge.

    In the boardroom:

  • Monitor that care model design is integrated with and tied to changing value-based payment methods.

  • Ensure that care design incorporates more front-end assessments of patient health status and integration of multiple data sources that will result in more effective care coordination.

  • Is your IT system the backbone for effective clinical care delivery? Your systems must achieve interoperability to coordinate multiple data sources that drive analytics and provide real-time information that is essential to eliminating duplication, reducing unnecessary utilization and costs, and providing bedside information that impacts clinical decisions and care paths.

10. Risk-Based Contracting and Financial Sustainability
A common theme through many of the trends noted to this point focuses on the increasingly important need to achieve further efficiencies, economies, value, and quality improvement initiatives to eliminate waste and reduce costs in the system. As the shift from fee-for-service (FFS) to value-based reimbursement (VBR) becomes more pervasive, more financial risk will be shifted to providers. More two-sided and full-risk (e.g., global capitation) reimbursement models will be offered to providers in areas that have not traditionally seen these arrangements from public and private insurance options. Both two-sided and full-risk brings with it clear incentives to proactively track and manage admission rates, referral rates, per-unit costs, the total cost of care, and other metrics that aren’t traditionally tracked under FFS. Organizations that still lose money on Medicare FFS business will likely find it more difficult to be financially sustainable on risk-based and VBR models of payment.

2016 will see more sophisticated efforts to create organizations that are capable of pooling resources to accept greater risk while lowering development and infrastructure costs for its members. These include CINs and the super CINs described in the population health trend above.

Other forms of risk that providers are taking on include owning a health plan, two-sided risk with corridors, receiving capitated and global payments for defined services, global capitation by physicians, bundled payment, episodes of care (e.g., MS-DRG), and other forms of value-based incentives. All of these should be assessed for their potential value in creating a sustainable organization in the future.

    In the boardroom:

  • What is your organization’s appetite and plan for taking on greater payment risk? What should it be?

  • Does your hospital/health system make money on Medicare FFS patients? If not, initiate a discussion around possible scenarios and conditions where breakeven on Medicare reimbursement could happen (e.g., focus all efforts to reduce costs per discharge).

  • Are you now part of a CIN or other affiliation model with other providers that will provide the vehicle to accept more risk-based payments? Is there a super CIN in your future? Will you be the integrator, or the “integratee”?

Final Word
2016 has the potential for surprises so no board can take a “wait and see” attitude. Proactive, difficult discussions are required to address issues of independence, integration, breadth of affiliation and alignment considerations, service offerings, efficiencies, quality, and patient focus. Systems and processes of care delivery need to be streamlined, improved, and made more cost-effective. Are you adopting a “world-class healthcare experience” mindset? Are you courageous enough to adopt a mindset of eliminating any element that does not contribute to the quality of patient care? We are confident that effective boards will see 2016 as a year of hard work, difficult decisions, and great opportunity!

The Governance Institute thanks Steven T. Valentine, M.P.A, Vice President and West Coast Leader of Consulting, and Guy M. Masters, M.P.A., Principal, of Premier, Inc., for contributing this article. They can be reached at (818) 512-0349 or and (818) 416-2166 or

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Affiliations: Matching Objectives and Risks

ACA implications are causing hospitals to actively consider their strategic financial options. This has resulted in a sharp increase in affiliations. In this article, James E. Burgdorfer clarifies some of the issues surrounding these structures, including the types of affiliation arrangements, certain risks to be considered, and a suggested overall framework in which to consider affiliations.

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By James E. Burgdorfer, Juniper Advisory

Affiliations are contractual arrangements between two or more hospital partners in which they agree to work together on projects. No ownership or control is exchanged in affiliations; however, the term is sometimes used euphemistically, or incorrectly, to describe business combinations. These sorts of agreements have existed for many decades as non-profit hospitals have pursued contractual approaches to improve qualitative, operational, or financial performance. Most often, they represent an effort to share ideas and resources with an objective of economic efficiency and improved health while remaining independent.

Non-profit hospitals are actively considering their strategic financial options due to the economic and medical care implications of the Affordable Care Act (ACA). This activity has not, at least to the present, resulted in a meaningful increase in the number of completed business combinations. It has, however, resulted in a sharp increase in the number of affiliations that are being entered into. Despite the scant empirical support and bubbly atmosphere behind many affiliations, independent hospitals are actively pursuing them in an effort to access the benefits of increased scale without ceding ownership.

Because few parallels to affiliations exist in the corporate world, far less critical thinking has been given to them. This article seeks to begin to clarify some of the issues surrounding these structures, including the types of affiliation arrangements, certain risks to be considered, and a suggested overall framework in which to consider affiliations.

Affiliation Objectives

Affiliations take many forms, including management agreements, purchasing cooperatives, clinical affiliations, shared services agreements, and accountable care organizations (ACOs). Based upon the objectives of the partners, there are several types.

Clinical affiliations involve working with one or more partners to provide particular clinical services (e.g., cancer care). These are often arrangements between community hospitals and larger medical centers within a particular region. The larger partner is selected for its abilities and reputation in the relevant service lines. In addition, there are many co-branding affiliations between independent hospitals and nationally prominent medical centers (e.g., Cleveland Clinic, Mayo Clinic, and MD Anderson).

Scale affiliations center on achieving economies in certain operating areas, notably purchasing, information technology, billing, legal, and marketing. Two types of scale affiliations are particularly active in today’s market and deserve note:

  • Information technology: There is a tremendous increase in affiliations focused on sharing IT platforms. Inevitably, these involve larger hospital systems that “rent” their platform and expertise to independent hospitals, often in exchange for a break in cost. Theoretically, these arrangements are a mutually beneficial exchange of cash for services. In practice, however, they expose the smaller system to a number of unintended risk factors due to asymmetries in the relationship.

  • Population health: As hospitals seek risk-based incentive contracts to care for specific groups, larger population bases and a broad array of services are required. Independent hospitals are entering into ACO affiliations because they often do not have the number of patients to manage actuarial risk.

Contracting affiliations occur when hospitals seek to combine sufficiently to achieve coordinated payer contracting. These are subject to complex rules and usually involve long-term management agreements and other linkages. Blue Cross Blue Shield’s refusal in late 2014 to negotiate rates with a clinical affiliation between Silver Cross Hospital, an independent hospital in suburban Chicago, and Advocate Health Care, the largest multi-hospital system in Chicago, reflects the difficulty present in these sorts of arrangements.

Perspectives on Risk

By their nature, affiliations are not well-suited for long-term needs. Rather, in varying degrees, they trade economic benefit for maintenance of ownership and governance control. Affiliations are often designed to promote flexibility and autonomy rather than to maximize outcomes. Hospitals that pursue affiliations to solve long-term needs, such as improving cost structures, face the risk of overreliance on a partner whose interests may change. While affiliations do a good job of preserving local control and are relatively easy to implement, certain drawbacks should be considered.

Operating risk occurs when affiliations are short-lived or fail to meet objectives. They are inherent in many affiliations because the parties often have separate core objectives. Since there is no exchange of ownership, it is easier for the parties to argue about resources and approaches rather than collaborating to optimize care for the community. Smaller partners in affiliations typically risk becoming too reliant on these structures. Should either partner decide to exit, the smaller partner is left weakened.

Corporate control and value risk relates to the possibility that hospitals entering into affiliations might become fully absorbed into their partner with no economic consideration being received. This existential threat needs to be avoided at all cost. These unfortunate outcomes usually result from operationally extensive affiliations in which the larger party achieves fundamental control over the smaller party. Some industry experts refer to these as slow-motion giveaways or bear hugs. This phenomena is exacerbated by certain contractual provisions often found in affiliation agreements, most notably rights of first refusal.

Unwinding risk occurs when hospitals find that terminating existing affiliations is more costly than continuing the relationship on unfavorable terms. Affiliation agreements sometimes include buyout provisions that are too expensive for the smaller members to execute, or that leave the junior partner with untenable financial management or operating gaps. Smaller organizations often surrender to the poor financial circumstances of the affiliation, or submit to bear hugs, if they find the cost of exiting to be prohibitively high.


In light of the risks of affiliations, additional consideration should be given on how to best structure these arrangements. A good starting point centers on three concepts:

  • Developing a basis of comparison: Hospitals often enter into affiliations without understanding their full range of strategic financial alternatives. Since these sorts of arrangements are often incremental in nature, they are pursued without exploring alternatives. Absent a simultaneous evaluation of all reasonable alternatives, it is not possible to know whether another model would have been a better overall business and community decision. Our experience suggests that the full range of strategic financial alternatives should be well understood as part of the evaluation of an affiliation. Such comparisons also may identify benefits from other arrangements that might be foregone in an affiliation. A comparison of strategic financial alternatives can also give organizations an understanding of their market value.

  • Matching objectives with structure: Since successful affiliations tend to focus on narrow and clearly identified improvements, developing a thorough and consistent set of affiliation objectives may enable participants to avoid risk. Also, affiliations are typically best at filling specific, near-term needs. To meet persistent needs, hospitals should explore alternative structures, or at least consider the impact of affiliations on longer-term alternatives. For example, should a hospital wish to consider a merger within the foreseeable future (e.g., five years) it might be unwise to enter into an affiliation for short-term gain at the cost of an expensive exit from the contract. This is because future merger partners are likely to be focused on one’s market share rather than current profitability.

  • Early consideration of termination provisions: Affiliations are designed to have finite lives. The challenge lies in knowing how to unwind them when they no longer meet the needs of both partners. To spur consideration of termination terms, each partner might detail ways that they would be best positioned after the affiliation ends. An all-too-common outcome is for the larger organization to absorb the smaller one at a lower economic and non-economic sum than the smaller hospital would have garnered prior to the affiliation. To avoid this fate, independent hospitals should explore the range of termination options before agreeing to the affiliation.


Affiliations offer an alternative to mergers that can fill organizational gaps and better position hospitals in the changing payment and operating environments. In the right setting, they can create meaningful short-term value. Many organizations have used these structures to fill gaps and improve services while maintaining ownership and local control. However, organizations often do not recognize the risks these structures pose. An open and rigorous assessment of the full range of options is crucial. To mitigate risks of entering into an ill-advised affiliation that can damage the organization over time, independent hospitals should simultaneously review all strategic financial alternatives, choose a structure (affiliation or other) that best achieves its objectives, and carefully anticipate how a future exit from the arrangement could be achieved.

The Governance institute thanks James E. Burgdorfer, Principal at Juniper Advisory, for contributing this article. He can be reached at

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Compensation Committee Priorities and Pressures in 2016

The responsibilities of compensation committees are increasing as they wrestle with complex compensation and benefit programs, parse market data analysis, apply regulatory standards, advance the mission, and seek to meet the traditional objectives of an effective compensation program. In this article, Ralph E. DeJong provides a rundown of the key issues on the agenda for compensation committees in 2016.

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By Ralph E. DeJong, McDermott Will & Emery, LLP

The responsibility of being a board member of a tax-exempt hospital or health system has never been more complex and time-consuming. For those board members who serve on the compensation committee, that responsibility has become more daunting as committees wrestle with complex compensation and benefit programs, parse market data analysis, apply regulatory standards, advance the organization’s mission, and seek to meet the traditional objectives of an effective compensation program. This article provides a rundown of the key issues on the agenda for most compensation committees in 2016.

Key Issues for Compensation Committees

The effect of accelerating changes in the healthcare industry. Committees are facing complex compensation issues that are the direct result of enormous structural change in the healthcare industry. These compensation issues include rapid changes to local competitors, increased competition for key talent, new types of executive positions, greater participation in executive leadership by physicians, integration-heavy incentives, retention incentive approaches, and geographic distinctions within the same system. Often these changes are occurring faster than the annual review process and annual data updates can adequately address. Committees have to be more nimble to keep up with the pace of change, which has implications for their review and approval process and the variety of compensation approaches being deployed, as well as how committees can confirm the reasonableness of compensation and benefits being provided.

Identifying and rewarding “star” talent. Committees are increasingly concluding that a uniform compensation program, with all executives sharing the same annual adjustment process and annual performance metrics, may be inadequate to identify, reward, and retain key executive leaders. Committees are considering the addition or enhancement of long-term incentive compensation for key leaders, retention incentives, additional performance bonuses, changes to an “across the board” salary increase approach, and other mechanisms to create more variability in their executive compensation programs.

Succession planning and leadership development. The sudden retirement or departure of a CEO or other key leader can be a significant setback for an organization. Committees are becoming more adept at anticipating changes in top executive leadership and in working with the CEO to ensure the development of a CEO succession plan, an emergency succession plan, and the identification and development of the next cohort of leaders in the organization. Some committees are tying CEO incentive compensation or additional performance bonuses to the CEO’s effective management of the succession planning and talent development process.

Does our performance match our compensation? Many organizations target the 75th percentile of the market data for executive total compensation when the organization achieves rigorous incentive performance goals. Committees increasingly are asking, if we are paying at the 75th percentile of our peers, is there any way to know whether we are performing at that level when compared to our peers? While there are some areas, such as Medicare patient quality scores or patient satisfaction scores, that have national benchmarks, many other performance measures do not yet have useful national data by which to assess an organization’s performance. Committees are working more closely with senior management to identify and use performance metrics for which national benchmarks are available to assess performance and position.

Impact of the for-profit industry. The healthcare industry is increasingly looking to the for-profit world for leadership talent in certain new growth areas, such as marketing, strategy, hospitality, pricing, and revenue cycle management. Organizations recruiting in for-profit industries need to identify and use for-profit compensation data to be competitive in the recruitment and retention process. Although representatives of the Internal Revenue Service have from time to time expressed concern about over-reliance on for-profit data, organizations that can demonstrate the sound business strategy of recruiting in for-profit industry or the risk of losing executives to for-profit industry should have strong support for the use of this type of data. Committees are increasingly willing to blend in for-profit data on a position-by-position basis where needed.

Independence of committee members. Committees realize the need for their members to be free of conflicts of interest (to be “disinterested”). They know that qualifying for the “rebuttable presumption of reasonableness” under the federal tax law intermediate sanctions rules depends, in part, on each member of the committee being disinterested as to each executive whose compensation is reviewed and approved, and that this is a different standard from being independent. Committees are wrestling with varying but related standards and expectations—distinguishing among being independent, being disinterested, adhering to the general conflict-of-interest policy, and reporting transactions and relationships on the organization’s Form 990.

More rigorous oversight of major drivers of total compensation. Committees are taking a closer look at the programs and arrangements that inordinately drive total compensation and amounts reported on the Form 990. These include supplemental executive retirement benefits, severance benefits, retention agreements, and even the strength of the incentive performance metrics. Committees are also taking into account the “ripple” effect of their compensation decisions.