Healthcare Issues & Trends

Advice & Insights for healthcare's Leaders & HR Professionals

Severance at Salinas Valley Memorial Healthcare System

Posted on September 1, 2011 by Eric Reehl

Salinas Valley Memorial Healthcare System (SVMHS) is currently being audited by the State of California because of questions about the compensation of SVMHS’ former CEO, Samuel Downing.  (This post gives an overview of the situation at SNMHS.)  SVMHS is not a client of Integrated Healthcare Strategies and we have no inside knowledge of Downing’s compensation.  The following discussion is based on media reports on Downing’s compensation.  One aspect of Downing’s compensation that should be examined in the audit is Downing’s “severance payment.”  Downing began working for SVMHS in 1972 and became CEO in 1985.  In 2008 he received a “severance payment” of $947,594.  However, Downing did not leave Salinas Valley, but continued on as CEO until 2011.   Although SVMHS calls the $947,594 paid to Downing “severance,” this payment is not severance as practiced in the health care industry.  Almost all top executives in health care organizations are eligible for some kind of severance under certain circumstances.  Severance is most commonly provided for executives when they are involuntary terminated without cause.  For example, executives receive severance when they are terminated because the hospital is acquired by another health system.   Severance is a way to smooth over any difficulties encountered when an executive leaves an organization.  Severance benefits make it easier for an employer to terminate an employee, by providing the terminated executive with income security until he or she finds a new position.  In addition, severance makes it easier for the terminated executive to accept the change without feeling the need to extract damages for unjust treatment through litigation.  Severance benefits are not paid for voluntary termination (except in the case of diminution of duties), termination for cause, or in the event of disability.  Downing’s “severance” plan departs from health care industry practice by not being based on involuntary termination.  It appears that the Board of SVMHS agreed to pay Downing the $947,594 no matter what the circumstances were when he left.  Downing was to get the payment whether he was fired or whether he left on his own.  The payment appears to be some type of deferred compensation, not severance. Why did SVMHS make the payment three years before Downing left the company?  The Board decided to make the payment in 2008 to remove a future financial obligation.  According to the Los Angeles Times, “the board's intent was to remove the severance from its books in 2008 by giving Downing the money rather than waiting until he left.” So if the “severance payment” provided to Downing in 2008 was not severance, but really deferred compensation, did Downing get an actual severance payment when he retired from SVMHS in 2011?  The audit may answer that question.

Want a “Patient First” Culture? Then Start With an “Employee First” Culture

Posted on August 26, 2011 by Kevin Haeberie

We place our “patients first.” 

I can’t tell you how many times I have heard this phrase.  It is almost universally adopted by healthcare providers - you can find it on almost every website and entrance banner at thousands of hospitals.  During the last twenty years, the competition for patients has increased and healthcare consumers are more educated and are demanding better service, not just excellent healthcare.  This change in patient behavior creates a need for employees, physicians, and leaders to focus on customer service, both to provide a better outcome and to simply survive in today’s transparent, competitive healthcare environment.   Hospitals have spent millions creating “patient first” programs to establish a more responsive environment.  So what do those include?  Typical initiatives to building a “patient first” program include creating a slogan, all the connected communication tools and media, extensive training and education, performance metrics, and even connecting pay and bonuses to improved customer service.  With this concentrated focus, customer service has improved in hospitals, but even with all the efforts, the public’s perception of the levels of service in hospitals has reached a plateau, and even shows signs of declining. So what should hospitals do?  Interestingly, a few hospitals have found success with a seemingly counter-intuitive approach.  Instead of placing “patients first,” the hospitals place ”employees first.”  Why is this counter-intuitive?  Because it was the employee and physician-centric approach to healthcare that led to a need to refocus on the patients in the first place.  Think back to the way hospitals operated for many years; healthcare providers required the patient and their family to accommodate hospital employees, administration, and physicians.  Visiting hours were limited because families interfered with the delivery of care; surgeries were scheduled when most convenient for the physician, not necessarily the patient; double rooms were a more efficient use of space, but provided little privacy.  So why move back to an “employee first” model?  Hospital leaders began seeing interesting trends - when the cultural language conveyed a “patients first” message, employees and physicians saw themselves as less valued by the organization and engagement scores declined.  Other hospital leaders simply recognized a simple concept - if employees do not feel valued, it is less likely that they will  show high value for the patients and their families.  Twenty years ago, when the “patient first” movement gained momentum, many managers and directors commented that employees could not be focused on patients unless they felt positive about their workplace.  The managers and directors were on the right, path but thier excuse for low customer service scores was slightly off.  Customer service expectations themselves are not related to the satisfaction of the employee.  The real issue is that a less positive or less engaged employee can and should be expected to provide high levels of customer service, it is just much more difficult to motivate them to do so.  Customer service regularly requires an employee to look beyond what is easiest or best for them, and to instead look at what is best for the customer.  For someone to go against their own self interest requires more than just a fear of job loss or a catchy campaign, but a sense of feeling good about where they work and their willingness to share that positive feeling with patients and their families.  Simply put, a more engaged and satisfied employee is easier to motivate to perform higher levels of customer service.  It’s a simple concept, but an easier to motivate employee almost always results in improved customer service.  Not only improved, but sustainable.  I’ll reference a case where a metropolitan urban hospital has communicated to employees that they are first.  This inner-city hospital counters the idea that patients have to be placed on a pedestal in order to have high levels of customer service.  This hospital also shows that an urban facility can be attractive to all social and economic levels of patients in a community if the employees and the facility is inviting and positive.  By taking unique and effective approaches to placing a high level of effort in improving employee engagement and employee teamwork (for example, the first day of employment is not an in-classroom orientation, but instead a tour of the hospital and team interaction with employees), this organization’s leaders have found that employees are much more willing and easier to motivate to provide high levels of customer service.  Employees also freely and regularly suggest ways to improve the patient experience and go out of their way to meet the needs of the hospital’s patients.  The hospital values its patients and strives to provide the highest level of customer service possible, but by both stating that employees are their first concern and following through with corresponding action, this organization, and other hospitals like it, have found that placing “employees first” results in excellent customer service and a satisfied patient – which is the ultimate objective of any customer service program.

What’s Wrong with Severance?

Posted on August 12, 2011 by David Bjork

The Massachusetts Attorney General’s office issued a report on its investigation of Blue Cross Blue Shield’s termination of former CEO Cleve Killingsworth and paying him $4,260,000 in severance.  Original press reports said that Killingsworth was paid $11 million in severance, but much of that was for a retirement benefit earned over prior years.  It’s no wonder that this caught the attention of the press or that the Attorney General decided to investigate.   What is surprising, though, is that the AGO’s report criticizes use of executive employment agreements and paying severance when firing an executive for less than fully satisfactory performance.  One gets the impression that the folks in the AG’s office have never looked at CEO contracts and didn’t know that they all promise severance on involuntary termination without cause, that most employment agreements use automatic renewals, and that almost all of them call for severance if the contract is not renewed.  These are the facts.  Killingsworth was hired by BCBS in February 2004 as its COO, and his offer letter promised him severance if he were terminated without cause.  A year later he was promoted to CEO and given a contract promising severance if he were involuntarily terminated without cause.  Severance was set at two years’ salary, target incentive award, and health and life insurance, as well as outplacement and financial planning services.  His target annual incentive award was equal to his base salary, so two years’ pay was four times his annual salary.  His salary was $1.04 million, so the total was over $4 million.  Killingsworth resigned after a period of weak financial performance, at the request of the board, but for reasons that did not amount to “cause” as defined in his contract (dishonest acts, willful violation of regulations or policies or code of conduct, commission of or conviction of a felony or a misdemeanor involving moral turpitude, deceit, dishonesty, or fraud; or a material breach of obligations under the contract).  While CEO, Killingsworth served on boards of as many as 14 other organizations, and earned significant compensation from three of them.  Under criticism and pressure from the AGO, BCBS decided to rebate $4.6 million to policy holders.  After first concluding that BCBS owed him this severance, the AGO’s report goes on to criticize the settlement. Even on termination for poor performance, the board was still obligated to pay severance.  The automatic renewals entitled Killingsworth to remain in the job as long as he wanted, or until death, disability, or voluntary retirement, unless the board was willing to pay severance.  Paying severance could be avoided only if the reasons for involuntary termination involved intentional misconduct.     In the course of the investigation, the AGO obtained and reviewed CEO contracts from other local health care providers and insurers.  It found that all agreements promised severance, and that they all limited the circumstances under which the board could terminate the CEO without paying severance to acts involving intentional misconduct.  After admitting that severance might be important to protect a new executive, the report suggests that severance serves no important purpose after the executive has been in the job for a while, that severance shouldn’t be necessary for someone promoted internally or someone who doesn’t need to relocate to take the job, and that severance should be paid on termination for poor performance.  It goes so far as to say that “the AGO doubts any [executives of our large hospital systems and health systems] were such reluctant warriors as to require these protections before accepting the position.”  It also concludes that boards’ concern over the cost of severance or public reaction to it could lead a board to delay termination of an executive, which impedes the board’s ability to protect the organization.  Having found something it doesn’t like, the AGO decided that it will require tax-exempt health care providers and insurers to disclose all employment agreements with senior executives, with an explanation of the basis for the protection provided.  Totally aside from the purpose of the investigation, the AGO also decided to establish a new standard for nonprofits for CEO performance appraisal and for CEO service on other boards, if the boards pay their board members.  The report asserts that no board is really competent to perform an adequate performance review without external professional assistance; and that a CEO’s performance appraisal should include evaluation by subordinates and outside contacts.  It implies that a CEO’s service on a board, if board members are paid, as they are on for-profit boards, amounts to selling a charitable asset, which is implicitly a form of private inurement.  The prestige associated with the CEO’s position at a charitable organization is an asset of the charitable organization; and the CEO’s invitation to be a paid member of a for-profit board comes from the prestige of the position, not the prestige of the individual, so it amounts to selling a charitable asset for personal gain.  Wow!  This reminds me of a thunderous sermon from an uptight, pious Puritan preacher.  Yes, the $4 million in severance probably was too much.  Yes, BCBS shouldn’t pay severance on voluntary resignation—but it wasn’t really voluntary.  The practice of allowing executives to resign to save face yet still collect severance makes perfect sense in some ways, but it violates the terms of the contract and amounts to making a parting gift to a fired CEO (which would be an excess benefit transaction subject to intermediate sanctions, by the way, if it occurred at a 501(c)(3) charity).   But boards agree to pay severance for several perfectly good reasons, aside from the fact that they generally can’t recruit outsiders as CEOs without a contract offering severance on involuntary termination without cause (with cause defined narrowly to exclude poor performance).  One is that it actually makes it easier to terminate an executive, rather than harder, as the AGO assumes, since there’s no reason to feel bad about firing someone and no reason to worry about legal claims if you pay enough severance to buy a release from claims of discriminatory termination and enough to cover whatever guilt or embarrassment may arise in terminating a long-service CEO who has generally performed well.  (Killingsworth was, after all, a member of two protected classes and a colleague of the board members, as well as former chair of the board.)  Severance is both a form of liquidated damages for breaking a contract and a form of deferred compensation intended to provide income continuity in case of getting fired for no particularly good reason.  Many reasons for terminating executives have to do with issues that are a matter of perception, after all, and much of what is perceived as a performance problem is due to externalities.  It’s true that employment agreements aren’t needed for CEOs any more than they are for the multitude of employees who toil without contracts.  But it helps to have an agreement about what the penalty will be for firing a long-term employee (who must have been performing reasonably well, to survive in the job for a long time) for no good reason other than the board deciding that it is time to ask the CEO to leave.   Employment agreements also help retain executives, who can easily move to other jobs, almost whenever they want, and usually for equal or higher pay.  The employment agreement is a request from the board that the CEO promise to stay for a number of years, at a time when the CEO could just as well accept other job offers.  If the board then changes its mind, it is breaking a contract, and severance is the proper penalty for breaking the contract.  The board has enticed the CEO to stay with the organization and turn down other opportunities to move, with a promise of employment for a period of years.  By the time the board changes its mind, the CEO has already turned down other attractive opportunities that are no longer available.  Absent employment agreements and promises of severance, executives would move around more often.   They help employers retain good executives, every bit as much as they make it easy to terminate executives when it seems time to do so.  Four times salary may be excessive severance, because the underlying justification for a particular amount of severance is to keep income more or less whole until the executive finds comparable employment.  It might take a CEO a year or more to find a truly comparable position in a place he wants to work, but it shouldn’t take four years.  Severance is often based on total cash compensation (salary plus bonus), but that is hard to stomach when the salary is $1 million and the bonus is another $1 million.   Insofar as the purpose of severance is income continuity, continuing salary for a year or two should be sufficient.  Insofar as the purpose is to settle damages for breaking a contract (and for having given up opportunities to take other positions elsewhere), the damages probably should be some multiple of total compensation, particularly if the termination damages the executive’s reputation and makes it harder to find the next job, or if the termination occurs so close to normal retirement age that it more or less amounts to forced early retirement.  Don’t forget that Congress set the bar for severance when it declared that severance is deductible only up to 2.99 times total compensation.  That, in effect, blessed unnecessarily generous severance, and it led to a rapid increase in the amount of severance offered to executives.  Over time, boards have become more conservative about severance, and two times’ total pay is now more or  less the norm for CEOs of large organizations.  How, though, the AGO thinks it is an expert on CEO performance appraisal, is another matter.  I doubt that any of the attorneys who wrote the report know much about the range of processes used for performance appraisal.  They obviously don’t see the inconsistency between saying that trustees aren’t competent to appraise the CEO’s performance without external assistance and the premise that they are capable of governing the organization.  Most of the BDBS-Massachusetts board members are senior executives within their own businesses and undoubtedly have far more experience with performance appraisal than the attorneys in the AG’s office.  They presumably know what they want from a leader and use that in evaluating the CEO’s performance.  They may not be omniscient, but no external facilitator is going to be, either.

Five Building Blocks for Human Capital Planning

Posted on July 29, 2011 by James A. Rice, Ph.D., FACHE

Modern strategic planning for “Human Capital & Talent Management” (HCTM) begins with a Board and CEO-level self-assessment framework that has five parts. Each part contains questions for a quick assessment by the leadership team of the Health System’s human capital policies and practices in the respective area. Not every health system will have these capabilities, and most of the conclusions that users arrive at can be expected to be somewhat subjective. The checklist is intended to be a relatively simple diagnostic tool rather than a methodologically rigorous evaluation. It is meant simply to capture senior leaders’ informed views of their health systems’ human capital policies and practices. Users may wish to develop a kind of “status check” of their health systems’ human capital situation, in which case they may wish to respond to the questions with answers ranging from “not at all” to “generally not” to “partially” to “generally yes” to “definitely (or completely) yes.” However, regardless of whether health system leaders choose to record their views in these terms, the overall picture that emerges through use of the checklist should help them begin a more systematic, in-depth, and continuous effort to evaluate and improve their health systems’ human capital systems. The five parts of the human capital self-assessment framework are:

  • Goal 1. Strategic Planning: Establish the Health System’s mission, vision for the future, core values, goals and objectives, and strategies.
  • Goal 2. Organizational Alignment: Integrate human capital strategies with the Health System’s core business practices.
  • Goal 3. Leadership: Foster a committed leadership team and provide reasonable continuity through succession planning.
  • Goal 4. Talent: Recruit, hire, develop, and retain employees with the skills for mission accomplishment.
  • Goal 5. Performance Culture: Empower and motivate employees while ensuring accountability and fairness in the workplace.

Rewarding Success at Meeting Community Needs

Posted on July 15, 2011 by David Bjork

The Patient Protection and Affordable Care Act requires hospitals to conduct a community needs assessment every three years and make it widely available to the public. Hospitals must attach their implementation strategy for meeting community needs to its Form 990, beginning with any tax year starting after March 23, 2012.  (That would be starting next year for hospitals with a fiscal year starting in April, July, or October; and in 2013 for hospitals operating on a calendar year.)  The IRS just issued a notice of proposed rules, Notice 2011-52.  See  Given the various attacks on hospitals’ tax-exemption, some experts are advising hospitals to do more to publicize all the community benefits they provide in exchange for their tax exemption.  Some even suggest tying a portion of executives pay to community benefit or tying tax-exemption to the amount of community benefit provided.   Some boards already tie a portion of executives’ incentive awards to community benefit in one way or another.  Some set a hurdle that must be passed before any incentive awards can be paid.  Others tie a portion of incentive opportunity to specific goals related to community benefits.    Now that hospitals must develop, publish, and implement a strategy for meeting community needs, doesn’t it make sense to tie a portion of incentive opportunity at every hospital to its success at achieving whatever goals it sets for meeting community needs?  This would demonstrate hospitals’ outward focus on serving their communities well.  Otherwise incentive awards demonstrate an inward focus on operations—clinical quality and patient safety, patient service, and operating efficiency or cost-effectiveness (keeping costs below reimbursement).  Of course providing safe, high-quality, patient-focused care is meeting community needs and is therefore a community benefit, but this in itself may not be enough to justify continuing public support for hospitals’ tax exemption.  The new regulation suggests that more is required or at least expected.    Some might argue that tying a portion of pay to meeting community needs could distort the intent of this new requirement, by turning it into something that is intentionally structured to justify pay, or structured to make it easy to earn a reward.  But incorporating measures of community benefit into an incentive plan could encourage hospitals to do an even better job than they do now in meeting community needs.

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