HCA shareholder wants quality, not profit, to play bigger role in exec bonuses

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An HCA Healthcare shareholder is pushing the investor-owned hospital chain to make quality a bigger factor in what its top executives get paid.

The Graphic Benevolent Trust Fund, which provides death benefits to members of the International Brotherhood of Teamsters, wants its fellow HCA shareholders to vote in favor of having the company study the feasibility of increasing how much quality performance factors into executive incentive pay. The proposal would need “yes” votes from over 50% of shares present in person or by proxy at the Nashville-based company’s annual meeting on April 28.

HCA’s formula for calculating financial bonuses for its top executives under its Performance Excellence Program is strongly weighted toward hitting financial goals, with 80% of awards based on a single financial metric: earnings before interest, taxes, depreciation and amortization.

In his proposal, Kurt Freeman, representing the trust fund, wrote that although “ostensibly” the other 20% is based on quality metrics, that performance can be modified by EBITDA performance. If the earnings performance exceeds its target, each individual quality of care metric that qualifies for a payout is multiplied by the EBITDA payout percentage. Additionally, if EBITDA falls below 90% of the target, no payment is made on the PEP’s quality metrics.

In 2019, for example, HCA achieved targets for only three of nine quality metrics, Freeman wrote. But the EBITDA multiplier amplified performance on those three metrics, boosting CEO Sam Hazen’s bonus for the year, which topped $4 million, by over $100,000. Freeman did not return a request for comment.

“Using financial results to amplify performance on certain safety metrics has the effect of reducing the impact of subpar performance on other safety metrics,” the shareholder proposal said.

The proposal said the quality metrics that were not amplified in 2019 because performance fell short include: inpatient experience—the most heavily weighted quality metric—sepsis care management and elective early delivery, which are both “core measures,” and measures of three hospital-acquired infections.

“We are particularly concerned about this impact because the target levels for two of the infections were set below the 50th percentile nationally, which is unambitious,” the proposal said.

At not-for-profit health systems, quality performance typically determines 20% to 25% of executive bonus pay, said Tom Pavlik, managing principal with SullivanCotter. Patient experience—which is lumped into HCA’s quality metrics—is typically pulled out as a separate category from quality metrics, which itself determines 20% to 25% of bonus pay.

“Clearly when you’re adding more weight, it’s a key metric you want executives to focus on,” Pavlik said. “But balancing it with the fact that the higher you push one weight, the less focus you’re going to have on other key metrics. That’s the nuance of it.”

Freeman noted that his organization’s proposal gives HCA’s compensation committee “total discretion” to identify potential new metrics, adjust the weighting of existing metrics and decouple quality and financial metrics.

In its response to the shareholder proposal, HCA did not dispute any of the factual information presented. The company noted that its board and compensation committee, with input from an independent consultant, evaluate annually the weight of quality metrics on annual incentive pay, and have determined the current weight is appropriate.

HCA said that beginning with its 2014 incentive program, 15% of annual incentive pay was based on quality. That increased to 20% in the 2016 program. The company noted that 81% of its hospitals received safety grades of A or B from The Leapfrog Group in 2020, compared with 58% of non-HCA hospitals.

“HCA Healthcare’s primary objective is to provide the highest quality healthcare to our patients, and our executive compensation philosophy is centered around creating a strong, positive link between our performance and compensation,” the company said in a statement.

In 2020, HCA’s proxy shows its CEO’s performance excellence plan payout was $3.5 million. That’s even though the company did not meet certain infection-control metrics during the year. The company also revised its EBITDA goal for the year to account for the pandemic and eliminated the months of March and April in calculating its earnings performance. Hazen’s total compensation last year was $30.4 million, including a $1.3 million base salary.

HCA generated $3.8 billion in profit in 2020—even after returning all of its federal stimulus grants—up from $3.5 billion in 2019. The company has taken heat from unions during the pandemic, who have criticized what they say is a lack of spending on COVID-19 safety measures, including supplies and staffing, in favor of upping profit.

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