October 4, 2022

What are the consequences for these health systems if they do not have a completed succession plan?

Alex Kacik: So, like I mentioned earlier, only 44% of 260 hospitals surveyed in the 2021 Governance Institute Report maintain a written updated CEO and senior executive succession plan. A bad executive hierarchy and cost a health system between five and 15 times their base pay. That was from one source who was quoting a report from Acadia, which is a consulting firm.

So outside of the financial consequences, if the transition isn’t communicated well regarding the intent behind the transition and the process, you know, you more employees may leave. Rumors circulate about job changes, layoffs and restructuring, and things snowball quickly. I was talking with health systems to figure out what their plans are. And one anecdote from Scripps Health, down in San Diego, told me, their CEO has a prewritten letter locked in a safe that he has written his picks for the next in line for his position and other senior executive positions. Only he and his secretary have access to it in case of an emergency and something happens to him. But as their communications team regularly updates a draft of an internal memo briefing employees on an unexpected leadership change. When it comes to planned departures, they have three levels of executive training programs, where employees can familiarize themselves with how different departments work, they can have these Q&A sessions with leadership. All that being said, this is a profitable, well-established system. I imagine organizations with fewer resources and a less experienced Board have a difficult time breaking away from day-to-day operations to get their succession plans sorted out.

So, Gabe, I had another question. And it’s something that we brought up earlier. But I if I were to ask you five years ago that major health system CEOs were going to leave that position for a venture capital firm that invests in healthcare tech, what would you have said?

Gabriel Perna: I would have been downright shocked. Now obviously, no one could have predicted a pandemic. Not only did that create turmoil within health systems, as he said, and gave a lot of these people an incentive to leave. But it’s created this opportunity for digital health and transformation. You know, people have realized that they can get care out of the hospital and out of the doctor’s office in their homes, it’s very appealing. We went from less than 1% of visits being done via telehealth to 80%, to where it’s kind of settled and now around 20%.

That’s a huge shift, you know, from less than one to 20%, that is a huge shift. And that has basically happened overnight. But even still seeing all that it still is very surprising. I’ve covered this industry for 10 plus years, and for the longest time, healthcare has kind of had to go kicking and screaming into adopting technology, most famously with EHRs. But it does seem that important people are seeing the value in front of them, seeing the opportunities in front of them and making this switch. I mean, Dr. Harrison, he was the CEO of Intermountain Health, that probably made him one of the more powerful people in the entire state of Utah. So, for him to leave that for a VC, you know that for a VC that invest in health tech, that says a lot I think.

So, I think we’ll be seeing more of this that if guys like him and Klasko are setting the standard, I think you’ll see others make the switch.

And as the CEOs change jobs, Alex, what will be the impact on pay? We were talking about it earlier, you know, the pay is an incentive for some of these guys, to make that switch. But, you know, from the health system side, what’s that impact?

Alex Kacik: With more turnover, you’re just going to have upward pressure on base pay and incentive. So particularly now, succession planning, discussions carry more weight, as things are so tumultuous in the healthcare environment. You know, boards are tasked with finding a CEO who can, like you said, manage the shift to remote care, which is a pretty big overhaul, working with new payment models, waning reimbursement levels and a workforce in flux. So those who qualify for the job will get a pay boost, the experts I spoke to said.

We actually, Caroline, our finance reporter, just came out with a good story in this week’s magazine about executive pay trends. And part of the data that we got from the exec pay consultancy SullivanCotter showed that total cash compensation for hospital CEOs rose 17.2% from 2021 to 2022, according to the survey 493 hospital CEOs. That’s a bit higher than average. And, you know, I imagine, over the next year will incrementally see these pay bumps. Hospital executives pay, though, has increased steadily over the past decade.

I thought one of the interesting things that a source told me was that the pay increases aren’t necessarily linked to performance. Obviously, some of the incentives are performance based, but they’re often a product of competition. So, you know, as you see different entrants coming into the market, and you are competing for similar levels of talent, you know, that could just be a could be the main driver there.

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