Margins, Staffing and Salaries in FQHCs

Posted September 23, 2014

Let’s talk margins in FQHCs — and what they appear to predict. Quick bullets for those who don’t have a lot of time to read:

Margins don’t translate to any difference in what percent of expenses are directed to salaries and benefits.
Margins appear to have a minimal effect on average pay.
Higher-performing organizations tend to have a lower level of staffing than predicted for their size.
CEO pay appears to be highest among high-performers, but this apparent relationship disappears when health center size is taken into account — in fact, when size is taken into account, CEO pay is actually higher among the poorest performers.

Earlier this year, one of my clients asked me to take a look at compensation levels and FQHC performance to see whether organizations performing better (from a financial perspective) paid more to their CEOs. As is normally the case, there is no easy answer to the question, but certainly a lot of interesting results to discuss.

To measure margin performance, we took the total net revenue for FY2012 and FY2011, and divided by the total revenue for FY2012 and FY2011. Because timing affects so much, we decided that a two-year period would be a more accurate reflection of performance than one year. Based on some suggestions from FQHC executives, we divided the population of nearly 700 FQHCs studied into five margin categories, and gave them very simplistic labels:

very poor performance (4.5% of sample): less than -8.0%
poor performance (5.2% of sample): -4% to -8%
break-even performance (39.8% of sample): -4% to 4%
good performance (22.6% of sample): 4% to 8%
very good performance (28.0% of sample): more than 8%

Obviously “performance” is much more than simply financial results, but in this analysis it is the only measure we have to work with. The average two-year total margin was 4.75%, with a median of 4.11%. Half of the health centers had a two-year total margin between -0.45% and 8.72%. The good news is that far more FQHCs have money left over at the end of the year than those who have to borrow or dip into reserves to get by. More than half of the health centers had two-year net revenues in excess of 4% for the years 2011 and 2012.

It may be more interesting to ask how the health centers achieved this type of performance, and how it translates to pay. Because pay is by far the largest expense, we would expect to be able to predict a lot from this kind of information. To begin with, there is effectively no difference between the percentage of expenses devoted to salaries and benefits among the health centers with different levels of financial performance. From our last post, we also know that there is a very close predictive relationship between staffing and average pay, with those with lower than predicted staffing paying more than a third higher ($40,000 compared to $30,000).

It is not that clear whether there is a significant difference in average pay when margin is taken into account. The “break-even” health centers had average pay of about $37,500. The worst performers, on the other hand, paid an average of $41,700. That may be a little deceptive, however, because the difference between the medians is much smaller, with the median pay of $37,000 among the poorest performers actually less than the break-even group ($37,500).

The highest median pay ($38,300) is found among the “good performers,” 2.7% higher than the overall median. Interestingly, the “very good performers” actually pay about 1.4% less than the “break-even” group.

What might all this mean? It is certainly simplistic to conclude that “very good performance” translates to “pay less.” However, there is yet another characteristic of the very good performers — they have total staffing much lower than the norm. More than a third of the very good performers have more than 25% fewer employees than predicted for their size, and the combination of “very good performance” and “> 25% less than expected staffing” makes up about 10% of the total sample! High margin equals “pay a little less,” but lower staffing equals “pay more.” When we take both staffing and performance into account, this group does actually pay just about at the overall median — apparently at this level the two characteristics cancel out.

When it comes to the over-staffed (more than 25% higher than predicted) health centers, margin does not appear to have much of a difference; pay is consistently lower. I believe that this is in part the fact that “over-staffing” likely means that these health centers use more part-time employees, thus reducing average annual pay.

But going back to the original question — how does financial performance affect CEO compensation?

The bottom line is that it seems to predict absolutely nothing. At the highest level, only looking at financial performance, it appears that higher financial performing health centers pay more. Once adjustments are made for size, and for staffing, there is little that can be said about CEO compensation. If anything, and this would likely not survive strict statistical scrutiny, it appears that the poorer performing health centers pay their CEOs more than average, and certainly less than the higher performing health centers, which appear to pay slightly less than those who fall in the “break even” category.

The truth is: revenue continues to be the best predictor of CEO compensation among FQHCs. It does not tell how much an organization should pay, but can tell you what you should expect to pay. It is by no means a perfect predictor, but even with a sample size approaching 1,000, we cannot find a factor that modifies the prediction enough to provide significant added value.

The information presented in this post is taken from Merces’ recent study of the Form 990s of more than 1,000 FQHCs. For further information, or to discuss how the results can be applied to your organization, contact Ed Ura at ebura@mercesconsulting.com.