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Salary Caps - What's the Application to Healthcare?

Most North American sports leagues have some sort of salary cap in play. Whether it be a luxury tax, soft cap, cap on total spend or others, there are mechanisms that limit the amount a team can spend on their players. In the beginning, salary caps were introduced to slow the appreciation of professional athlete’s salary. While controlling costs is still the prime benefit, it also has had a leveling effect on competition.

Greg Crabtree, in his book Simple Numbers, Straight Talk, Big Profits, outlines a very similar method of thinking for businesses. He sees that most industries have normal ranges of total compensation in relation to gross revenue. He advises that companies should think in the same way sports teams do by applying their industries benchmark wage percentage to their gross revenue to determine their own salary cap.

The power of this exercise comes through looking at things in a different way. By restricting the total spend, you are forced to answer some tough questions:

  • What real value am I getting from spending each dollar of compensation on my employees?

  • What expertise is necessary for me to have a successful practice?

  • Do I have the right people in the right seats?

MGMA does a great job at giving us benchmarks for support staff. If you applied those benchmarks to your annual revenue, what would your salary cap be? If you are over the cap, how would you reorganize your players to both meet the cap and remain competitive?

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