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The Evolution of Peer Group Construction

The Evolution of Peer Group Construction

The basic tenets of peer group construction in tax-exempt health care have not changed much over the last decade.  As health care advisors, we are still tasked with providing market data for clients that represents like organizations and like positions, especially since IRC 4958 requires the compilation of data on like organizations and like positions in order to take advantage of its “safe harbor” and create a rebuttable presumption of reasonableness.  We still need to pay attention to whether a client organization focuses on educating new physicians (in which case we would suggest that peers should be other academic organizations), whether a client organization has a significant number of subsidiary hospitals (in which case we would tailor the peer group to only other organizations with a similar number of subsidiary hospitals), or whether a client organization is an integrated delivery system that employs physicians and manages risk for a patient population (in which case we would ensure that only other similarly-integrated organizations are included in the peer group).

But some things have changed in our approach to compiling lists of peer groups for tax-exempt health care organizations. 

First, it is now much more routine for us to dig deeper into what constitutes a “like organization” than just measures of size like net revenue, staffed beds, or full-time equivalent employees.  We’re now more likely to dig into quality indicators such as HCAHPS scores, the inclusion of peer group organizations on lists of high-performing organizations (e.g., U.S. News & World Report’s Best Hospitals  list, Truven’s Top 100 Hospitals list), bond ratings of peer group organizations, and data on employee engagement (our firm offers unrivaled benchmarking depth on employee engagement).  A recent engagement, where our client asked us to propose a more robust peer group of organizations that have hospitals on Truven’s list and that have excellent financial performance, as evidenced by their bond rating, illustrates how clients are engaging us for their executive compensation questions.

Second, we are increasingly asked by clients to provide data on for-profit organizations as an additional source of data.  These requests tend to come from larger clients that compete for executive talent with other large, publicly-traded companies.  Now that we are part of Gallagher Benefits Services and affiliated with other firms like James F. Reda & Associates, we can offer clients the highest level of service in providing clients with for-profit data and advice.    

Third, industry consolidation makes it more critical than ever that we maintain a real-time updated data base.  The rapid pace of healthcare consolidation over the last few years means that organizations that were once appropriate peers for a particular client are no longer appropriate due to increased size, or that peers that were once too small to be considered a peer to now be within size parameters.  It also requires us to keep only the most current compensation data so that we can recognize the impact of consolidation on a particular organization’s pay practices.   

We anticipate continued interest from clients in our ability to compile peer groups that are attuned to their unique needs as the healthcare industry continues to consolidate and as they face increased pressure to deliver high-quality health care while maintaining their financial health.  

Jeff Christenson

Jeff Christenson is a Senior Consultant in the Total Compensation and Rewards practice of Integrated Healthcare Strategies, a division of Gallagher Benefit Services, Inc., specializing in executive total compensation.

He is responsible for managing total compensation projects, including developing salary structures, assessing the reasonableness and competitiveness of executive compensation, and designing incentive plans.  He also prepares clients for media inquiries regarding executive compensation and governance.

Mr. Christenson has advised a variety of health care organizations, from small ...

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