Healthcare Issues & Trends

Advice & Insights for healthcare's Leaders & HR Professionals

Staff Compensation: Building a Foundation

Posted on July 20, 2015 by Susan O'Hare

Susan O'Hare

Staff compensation constitutes about 50 to 60 percent of the total operating costs of a hospital. As the single largest component of the expense budget, it gets surprisingly little attention in boardrooms and senior staff meetings. While most boards pay a great deal of attention to executive compensation, and many also devote time to physician compensation (all should!), most boards do not pay attention to staff compensation, even though it represents a higher cost to the organization.

Surveys of HR staff have shown that nearly all organizations try to position pay for non-exempt employees at the market median or average. This is typically not an intentional compensation philosophy, but a habit that has been followed over the years without a lot of discussion. Budgets for pay increases are typically set in a top-down fashion by finance as part of the budgeting process, and not by HR as a reflection of market forces or as a thoughtful adjunct to support culture. As long as the organization is able to fill vacant positions, everyone assumes things are working well. But this kind of laisez faire approach is, at best, not strategic, and at worst, it may be harmful to the organization and its culture in any number of ways.

This article discusses just three foundational steps in designing and administering staff compensation that will lead to a better use of scarce resources and greater employee satisfaction with pay.

Compensation Philosophy

The foundation of staff compensation is the compensation philosophy. At a minimum, the philosophy should define who is responsible for making pay decisions, whom the organization compares itself against for recruitment and retention purposes, and how the organization intends to position pay versus the market.

With most hospitals targeting pay at market median or average, the way “market” and how the appropriate peer group for comparison is defined becomes critically important. The market for staff-level talent is not just other hospitals in the same community. The market for housekeeping includes the hospitality industry. The market for IT jobs includes general industry. The market for maintenance workers and the trades includes construction and other businesses employing skilled tradesmen, whether licensed or not licensed. Depending on the position, the market for talent may also include universities and government services. But unless there is a shortage of applicants for a particular “hot” job, most organizations don’t give much thought to the market for talent.

Many organizations fail to adapt their definitions of market as the competition for talent for particular jobs changes. For example, some jobs have become “virtual,” such as coders and epic/IT related positions, where continuing to rely on a localized peer group handicaps an organization’s ability to hire and retain experienced individuals.

Periodic Compensation Audits

Every hospital’s financial statements are audited annually, but the largest cost – staff compensation – is rarely, if ever, the subject of a third-party audit. Periodic audits of compensation will confirm whether the organization is paying competitively and identify areas where it can improve. It’s like a building inspection – it can tell you whether your foundation is stable and in good repair, and show you where a little maintenance is needed and how to pro-actively prevent problems in the future.

Markets are not static, and they do not move in parallel. If nursing pay is increasing by 3% per year, that doesn’t suggest that pay for housekeeping or cafeteria workers should increase at the same rate. A budget-driven approach to wage increases will eventually result in overpaying some jobs and underpaying others. This is not an efficient use of scarce resources. Overpaying is a waste of money, and underpaying can lead to high turnover, which has a cost, too, because the hospital spends more money on training without reaping the benefits of having experienced workers.

An audit of staff compensation should focus on these fundamentals:

  • Benchmarking – how are you comparing your jobs to the market for talent?
  • Peer group – what employers or industries hire people with the same skills to do similar work? Do you have data for these peer groups?
  • Outliers – how many people are paid above or below market, and why?
  • Consistency – is there internal equity between individuals in the same job? Between related jobs? Between job families?
  • Market and merit increases – how have the increases provided by your organization compared to the market over the past several years?

Periodic audits can help fine tune the budget and salary administration processes to reflect true market movement, preserve internal and external equity, and shed light on special pay practices that were begun without the end in mind and may represent dollars being spent for situations that no longer exist. These audits frequently uncover areas where current or future cost savings may be found.

Communication Plan

There is little doubt that the way pay is positioned can have an impact on culture. But the way employers communicate with employees about pay can have a greater positive or negative impact on culture than the pay itself. It is human nature to believe we all deserve higher pay. An organization that does a good job of communicating about compensation philosophy and pay can defuse some of the perceptions of inequity and lack of fairness that will otherwise dominate water cooler conversations.

How many of your executives can articulate the compensation philosophy for employees?How many of your managers can do it? Simply having the conversation can help employees understand that pay is not haphazard; there is a structure that seeks to be fair and consistent. Without the discussion, employees will be left to their own opinions regarding how fairly they’re paid.

Many managers are hesitant to talk about compensation philosophy, either because they don’t understand their own pay, or they’ve received increases that are larger than those their employees receive. However, there is nearly always a positive story to tell about pay, and HR can encourage the discussion by creating talking points for managers, or directly assisting in conversations where managers need help. Besides communicating the compensation philosophy and emphasizing fairness and equity, these are some key points organizations should communicate each year before wage adjustments occur to help employees appreciate the investments being made in their compensation:

  • How many people are getting wage increases
  • How wage increases also increase the value of benefits
  • The total dollar impact of pay increases for workforce as a whole


This article has outlined three foundational steps in creating a sound staff compensation plan that uses resources wisely and encourages employee understanding of pay. By being intentional about setting a compensation philosophy, conducting periodic audits to assure you’re doing things properly, and communicating with employees, you can improve the likelihood that the impact of pay on your organization’s culture is a positive one.

Medical Staff Development Plan – Actionable Plan for Physician Recruitment & Documented Rationale for Private Practice Support Payments

Posted on July 15, 2015 by Tony Kouba

Medical Staff Development Plans (“MSDP”) have been used by healthcare organizations over the past three decades to project the local and/or regional need for physician specialties.  Many forward-thinking healthcare organizations have maximized the utilization of a well developed Medical Staff Development Plan for:

·      Facilitating strategic and business planning efforts  

·      Developing strategies toward physician-hospital alignment

·      Differentiating clinical service offerings from competitors

·      Indentifying allied health practitioner needs

·      Documenting private practice recruitment support payments

Hospitals and health systems are required to have a Medical Staff Development Plan in place for the support of charitable purpose (e.g., maintain tax exempt status). The Form 990 requires hospitals and health systems to address community need and the hospital/health system’s role in meeting community “gaps.”  Additionally, the medical staff development plan has practical implications in which it assists in determining whether and how recruitment support can be given to an independent physician group (e.g., IRS regulations, Kickback regulations).  

At its most basic level, an MSDP essentially serves as an action plan for the recruitment (and retention) of necessary healthcare professionals into the community.  A well designed MSDP should include, at minimum, the following components:

·      A description of the community served by the hospital (i.e., the primary and secondary service area)

·      Physician-need-per-population ratios applied to the service area

·      Quantitative adjustments:

-       Aging in the population

-       Physician retirement and recruitment patterns 

-       National and regional healthcare resource utilization trends

-       Incidence of disease

-       Physician productivity

-       Outmigration of patients (types of cases)

·      Qualitative adjustments:

-       Interviews/surveys (physicians, community representatives)

-       Perceived work-style patterns  

-       Perceived recruitment targets of regional physician groups

-       Perceived community access to healthcare resources

-       Call coverage

The medical staff development planning process can be broken down into the following steps:

·      Determine physician supply and demand (defined geographically);

·      Issue the medical staff development plan itself – “fact base”;

·      Establish healthcare organization’s share of providing health care resources to the community; and

·      Determine physician recruitment targets and whether or not assistance can be provided to community-based private practice groups. 

Additionally, its also important for healthcare organizations to have a defined policy regarding physician recruitment.  For example:

·      If there is a deficit in the primary service area, Healthcare Organization can choose to employ a physician to meet that need or assist an independent group in recruitment and/or seeding of a physician. 

-       Recruitment is defined as those activities, and expenses related thereto, in recruiting and selecting a physician candidate.  Seeding is defined as those expenses related to the hiring and ongoing practice of a physician.

·      If there is a deficit in the secondary service area, Healthcare Organization can employ a physician to meet that need but cannot assist an independent group in recruitment and/or seeding of a physician. 

·      If there is a surplus in the primary service area or secondary service area, Healthcare Organization can employ a physician for reasons other than need (need as defined by Stark) but cannot assist an independent group in recruitment and/or seeding of a physician.

There are resources available to utilize when developing an MSDP, such as physician supply and demand statistics or pitfalls of retention plans. Check out the following for further information:

·     A Census of Actively Licensed Physicians in the United States, 2014

·    Top Physician Concerns That Affect Retention and Satisfaction

·    5 Tips for Developing a Lasting Medical Staff Plan

Integrated Healthcare Strategies, a division of Gallagher Benefit Services, Inc., is available to assist organizations with developing, facilitating and documenting the Medical Staff Development Plan and Physician Recruitment Policies.

Contact Tony Kouba at Gallagher Integrated for more information at

3 Insights US Healthcare Leaders Can Learn from the International Community: Translating a Global Experience into Local Lessons

Posted on July 6, 2015 by James A. Rice, Ph.D., FACHE

As a healthcare consultant at Integrated Healthcare Strategies, a division of Gallagher Benefit Services, Inc., it is a critical part of my job to convert knowledge from my decades in the healthcare industry into actionable insights for our clients. A good way to do that is to explore healthcare systems in other countries and bring those insights to clients in the US.

I have been fortunate to have had an opportunity to do this with a sabbatical from my position in the Governance Practice at the end of 2011 to lead a large global project in support of the US Agency for International Development (USAID) and Management Sciences for Health (MSH). I was able to serve as the chief executive of an initiative that worked on governance and management of grass roots health systems in resourced constrained countries in Asia, Africa and Latin America.

I am now able to share with Gallagher Integrated experiences from training programs for better leadership and governance in more than 40 countries. As I reflect on this work, and the current state of US healthcare—including the trend toward population health—there are three insights that can be translated to the domestic work of Gallagher Integrated clients:

1. Creative Compensation: Many of our clients are hospitals, healthcare systems, and large medical groups—and almost all are scratching their heads about how to deal with population health. Doing so will mean becoming more comfortable developing strategic plans and building incentive compensation arrangements that reward executives for taking on the health risks of whole populations and communities. The work I’ve done with public and private health organizations in other countries can help inform and enrich the dialogue that boards of trustees, medical leaders, and executives need to have about their strategies and initiatives to promote population health.

2. Continued Reinforcement: There is global evidence that high-performing healthcare organizations and systems dealing with population health need to be more disciplined, more formal, more explicit, more creative, and more engaged in unleashing and empowering consideration of many social determinants of health. This expanded view of what impacts health gains needs to be explored more at the intersection of work between boards, management teams, and physician leaders. When I left Gallagher Integrated in 2011, this was just becoming an important conversation. I believe it is now more important than ever, and has been reinforced by my time working in many countries. The beauty of the new merger with Gallagher is that they work in other sectors of the economy. So as we bring that diversity of perspective in to enrich, inform, and empower what we do in the health sector (and vice versa), our clients will be even better served.

3. Human Behavior: I have also found that across countries and continents, human behavior has common characteristics. You do not change the performance of a nation’s health system unless you change the behavior of the institutions in that system, and in turn one must change the behavior of the leadership of the institutions. So if we want US systems at the community or state-level to perform better, we should develop recognition and reward programs that enable and empower positive and productive behavior change at the intersection of physician, administrative and governance leaders. We have to leverage research on positive recognition and reward systems by continuously engaging with and listening to clients; not just developing new programs for incentive or merit pay, and build in new programs  that deal with intrinsic and extrinsic reward arrangements. That’s an international truth that our US healthcare organizations need to continually find ways to leverage.

As I step back into my role within the Governance Practice, I look forward to sharing these and other insights with clients attempting to navigate the ever-changing US healthcare system. Though these are lessons learned globally, they represent opportunities for success at home that I am excited to help our clients address.

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