How CFOs are Balancing Physician Compensation with Lowering Labor Costs

Hospitals want to bring down labor costs, but not at the risk of staffing turnover.

Hospital and health system CFOs are facing a bit of a dilemma when it comes to recruiting and retaining physicians. On one end, physician compensation is rising. On the other, slashing labor costs is a priority.

That reality necessitates that CFOs achieve a balancing act between employing top talent while keeping expenses in check. But hospitals' bottom lines aren't just affected by how much it costs to pay a physician. There are also opportunity costs and other expenses associated with physicians walking out the door in search of better compensation.

For that reason, cutting corners with physician salary isn't at the top of CFOs' to-do list. If anything, the opposite seems to be true, with hospitals acknowledging the competitive landscape for attracting and retaining physicians and showing willingness to invest in their workforce.

And investing will be necessary, considering recruiting incentives for physicians and advanced practice providers (APPs) have sizeably increased over the past year, according to report from staffing company AMN Healthcare. Based on a representative sample of 2,676 permanent physician and APP search engagements, AMN Healthcare found that the averaging signing bonus for physicians jumped from $31,000 in 2022 to more than $37,000 in 2023, while the average starting salary offer for many specialists shot up, such as a 12% year-over-year increase for orthopaedic surgeons.

"The demand for physicians has continued to increase," Leah Grant, president of AMN Healthcare Physician Solutions, told HealthLeaders. "With that demand, a lot of healthcare organizations are trying to figure out how to be more competitive and how to get a provider in the door faster. The faster you can get a physician into your clinic or hospital, the more revenue you are going to generate. You can also decrease patient wait times, which are a concern in the market. Decreased wait times can make you stand out in the market as a preferred provider."

Reducing turnover reduces costs

Getting physicians into your hospital is important—getting physicians to stay is essential.

Staffing turnover can be costly, so much so that giving a physician a raise in salary is often less detrimental to a hospital's finances than having to replace them.

According to a study published in the Journal of Hospital Medicine analyzing a large integrated health system, direct costs of physician turnover totaled $6,166 per incoming physician. The largest expenses stemming from turnover were additional clinical coverage required at times of transition, followed by physician time recruiting and interview candidates. While the total cost may seem low, it accounts for cost savings on salary difference between outgoing and incoming hospitalists, which was $5,561 per physician in the study.

What that total cost didn't factor in was that newly hired physicians may be less productive than established hospitalists, leading to less revenue. Based on the study's findings, a hospitalist in the first 25 days of employment would be expected to bill 33.2 fewer relative value units than a hospitalist after that period.

That's a big reason why hospital decision-makers are eyeing ways to cut down turnover.

Scott Wester, president and CEO of Memorial Healthcare System, recently shared with HealthLeaders how the South Florida-based nonprofit created $200 million in savings by dropping about 80% of use of outside contract labor and reducing turnover from around 21% to below their historical average of under 14% in just a year.

"We did it with the intention of understanding we had to make sure that we had a better talent acquisition team, making sure that we played more offense than defense, and by reaching out to the work community to try to figure out what are things that are maybe are limiting the people to come join our organization," Wester said.

"We work very closely getting information, understanding we needed to do some market adjustments on individual pay raises for certain job classifications, and working closely with our university and educational facilities."

Less reliance on contract labor

When a hospital isn't losing its physicians, it can be less dependent on contract labor, which boomed during the COVID-19 pandemic and put added stress on hospitals' margins.

Hospitals can still achieve profitability by paying their physicians while reducing contract labor costs. HCA Healthcare is an example of that, as evidenced by the health system's second quarter earnings. Though HCA saw its expenses for salaries and benefits climb 7.1%, a significant decline in contract labor costs of 20% year over year helped the system net $1.193 billion for the quarter, compared to $1.15 billion for the same period last year.

HCA CFO Bill Rutherford told investors on an earnings call: "Our hiring metrics are up, turnover is down. And I think that portends good things for us going through the balance of the year."

CEO Sam Hazen, meanwhile, said HCA wants to continue investing in its staff: "We're very competitive, we believe, across the organization with our compensation and benefit programs. We've been able to navigate through these difficult periods and maintain margins."

As hospitals move away from contract labor, they must also try to incentivize physicians with bonus programs and other benefits outside of straight compensation.

David Koschitzki, CFO at MJHS Health System, spoke with HealthLeaders about solutions his organization has focused on to retain and attract talent, such as employee recognition programs and initiatives "that speak to the personnel side of their job responsibilities."

Koschitzki said: "Staffing is primarily the largest investment that we've been making. As I said, we have to address compensation issues, and we must address the competitiveness of the industry. So, we've enhanced staff salaries as an investment in our staff, and we've enhanced programs to attract staff."