Monday, April 03, 2006

"Pay for Performance" for Health Care Managers

"The very rich are different from you and me," said F. Scott Fitzgerald.

In health care, managers also appear to be different from you and me.

The Los Angeles Times reported the latest wrinkle in paying corporate chief executives, "front-loaded" compensation, which may include signing bonuses, relocation bonuses, initial grants of stock, and "price protection" for stock options, that seem to belie claims that payment is linked to performance. As the Times put it, "this allows some chief executives to bank large sums of money before they've proved themselves on the job... And if things don't work out, companies still must pay failed chief executives a millionaire's ransom to go away."

The Times cited a study released by the Corporate Library which identified 11 companies as the "worst offenders" in paying executives for performance, including two in health care, Pfizer Inc and Merck & Co. The group of companies were notable for having negative share-holder returns over the last five years and poorer performance than peer companies, yet paying their CEOs more than $15 million a year. Paul Hodgson, the report's author, noted, "the focus of the report is not the CEOs themselves but the bad decisions of the compensation committees that are not paying CEOs for performance." The press release for the report "found that compensation committees authorized a total of $865 million in pay to CEOs who presided over an aggregate loss of $640 billion in shareholder value," and quoted another one of its authors, “Our research shows that the link between long-term value growth and long-term incentive awards is broken at too many companies – if it was ever forged properly in the first place.”

Many in health care policy and many managers of health care corporations are, of course, gung ho to apply pay to performance to physicians. But no such system would pay any physician even a fraction of a millionaire's ransom. We can only hope that any pay for performance system that actually is imposed on physicians will actually have some sort of link to realistic measures of performance and real incentive awards.

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