The Compensation Debate: Salary vs. Benefits for Physical Therapists Part II: Challenges and Employer Responses
The Compensation Debate topic received a lot of attention. There were enough questions, comments, and encouragement to necessitate this being a three-part series.
In part I, we outlined the framework for compensation, which is Direct-fixed and variable, also known as “take-home pay,” and Indirect-tons of options with a key advantage is that they are not generally taxed. The combination of direct and indirect is total compensation, and employers have plenty of choices and decisions to make to achieve their total compensation. Many employers make the mistake of not paying attention to the overall combination and inadvertently adopting many current trends, increasing costs significantly. This manifests operationally as margin erosion as labor consumes by far the highest cost in medical practices. In most cases, due to the tax favorability of indirect benefits, employers also unwittingly can harm the employee’s overall compensation by increasing taxes and thus actually reducing “take-home pay,” a problem they are trying to avoid. A key benchmark for professionals is that 30% is a typical “benefit load,” meaning that indirect benefits should be approximately 30% of direct compensation. In Part II, we will outline additional pressures and challenges of compensation over the last few years and general employer reactions to the trends. In Part III, we will craft some compensation options to try and align employee engagement with employer interests to create a “win-win”.
It is worth additional from last post detailing and clarifying the major role inflation has had on this dilemma as employees have needed more compensation to pay for the cost of living, particularly the rise in grocery and housing costs. To put this in a bit of perspective, beginning in 2022, the increase to an employer shifted from a rising percentage of indirect cost vs. direct cost. For example, historically, an employer may have increased salary percent by 2% (technically higher than the rate of inflation in most previous years) while indirect benefits may have gone up by 5% (health insurance rising in particular), resulting in a total compensation increase of 7%. In the last few years, to keep up with inflation, you would have had to increase direct comp by approximately 8% in 2022, 4% in 2023, and 3% YTD in 2024. Most physical therapy employers have had to increase even higher due to shortages and the reality is that indirect compensation (again, health insurance in particular) has also increased, causing salary, wages, and benefits (total comp or SWB) to become a much higher percentage of overall cost to an employer and particularly the ratio between SWB and revenue. In the last two weeks, 3 public companies in physical therapy reported their last quarter earnings, and comparing their SWB percentage to prior years shows that it is now about 53–55%. In historical context, a good standard just five years ago was that SWB costs were about 42–45% of revenue. Unlike most businesses, this 10% rise in cost can’t be passed on to customers-medical. Providers via reimbursements have actually crept even lower due to a rise in medicare advantage, medicare cuts, and generally zero increases by payors wreaking havoc on a business model predicated on revenues exceeding costs, with the biggest costs being employees!
When costs have risen at such drastic levels, employers have exercised 3 general options:
1. Revenue strategy: seek contracts that pay higher (e.g. shift payor mix to worker’s compensation, auto, personal injury who which tend to pay higher), re-contract with payors (almost impossible to do), stop agreeing to contracts with low rates (or opt for out of network), stop seeing patients whose reimbursement rates do not exceed the cost, or seek lower regulatory constraints in contracts. For example, Medicare and Medicare Advantage superimpose restrictions on physical therapists that are not aligned with state practice acts, limiting productivity (e.g. patient cannot be seen by extenders) and acting at top of license). This double whammy (rate cuts and higher regulations which increase cost), have made the patients that need physical therapy the most-our elderly, have arguably the least access. Many practices do this by selecting limited times on limited days or creating waiting lists that, in effect, compel the patients to look elsewhere.
2. Cost strategy: lower cost to try and make up for the significant increase in compensation costs. A few examples include lowering the amount of indirect compensation (benefits for employees), using virtual reception, scaling revenue cycle management (RCM) costs to get it from a traditional 5–6% to lower, decreasing marketing and other variable costs, decreasing spending on capital costs, and attempts to negotiate lower costs on everything from liability and worker’s compensation costs to supplies. The reality is that inflation is not limited to compensation, and many employers have seen their overall costs increase more than 5%, further eroding margins, making these efforts necessary just to stop expense creep.
3. Examining the productivity of therapists. The most significant trend has been the monitoring, emphasizing, demanding, and incentivizing productivity by those producing the revenues-the PTs and relatedly PTAs and, when applicable, support personnel. Since the cost of a visit can be $55 for the average payor (and some payors actually pay less than this per visit!), the concept is that more visits will lower the overall cost per visit to reduce it from 52–55% of revenue. Indeed, the highest-cost therapist is not the one that is paid the most but the one that has the least productive or has the highest per-visit cost as a percent of revenue. For example, a PT that is paid $75k per year for a total of $97.5k (using a benefit load of 30%) but averages 60% of revenue (e.g. a new grad, for example) is paid higher than a PT that is paid $120k per year ($156k with benefit load) but is at 50% of revenue. The contrary of this is also true. The lower cost PT is not the one lowest paid but the one that has the highest productivity (same example!). Please do if you must re-read this last sentence and run the math a few times. In the first scenario, the new grad generated 162k of revenues for the year, which, given credentialing lag, clinical confidence, inability to be productive, mentoring hours, and residency participation, is realistic. In the second, the PT produced $312k in a year, again realistic for a mature PT.
Getting back to the topic of this series, in the compensation debate, an employer has multiple lever arms to pull direct comp via sign-on bonuses, retention bonuses, variable compensation via productivity incentives and other bonus programs, and altering indirect benefits in an attempt to rightsize the business and deal with the economic headwinds of inflation, shortages, reimbursement. All of these impact the highest overall cost in a service business and, more importantly, affect retention, engagement, culture, and growth. Research and experience have a lot to say about this. Crafting an overall program that aligns with incentives will be the emphasis of Part III- stay tuned!
Any thoughts, experiences, or comments are appreciated.
@larry
