Thursday, January 1, 2009

Pay for Performance in Health Care, HCA's Stock Options

President elect Barack Obama wants pay for performance to solve the ills of health care. The most pure form of executive incentive compensation is stock options. Set aside the fact that almost 30% of executive teams cheated by backdating over a ten year period. How did stock options improve HCA's performance?

Four top executives exercised stock options for $12.75 a share. They flipped a portion of their incentive compensation for $55.86. That's a 338% profit. The options were exercisable in 2003 and expired in 2009. Spread the return over five years and it equates to 67.6% annual uncompounded return. That's double what The Carlyle Group earned on its investments.

How much will patients have to pay for HCA's stock options? The four executives bought 310,260 shares at $12.75. Had they flipped the whole enchilada at $55.86, their profit would be almost $13.4 million. That compensation is passed on through higher hospital bills.

HCA's quarterly report sheds light on executive performance. Interest expense is way up from 2003, provision for doubtful accounts rose, and net income fell precipitously from 2007. Don't forget their investing $626 million in level 3 (junk) assets. If they get the Fed to buy it, parent KKR might give the boys a bonus!

When the most pure form of executive incentive compensation makes no sense, why would our new President impose pay for performance on physicians? Surely, they can game the system as well as CEO's.